XNRGI Inc fka NPWZ

[ecokeneco]

NEAH POWER SYSTEMS, INC.
FORM 10-K
(Annual Report)


Filed 01/13/10 for the Period Ending 09/30/09
Address 22122 20TH AVE SE,
SUITE 161
BOTHELL, WA 98021
Telephone [phone]
CIK 0001162816
Symbol NPWZ
SIC Code 3690 - Miscellaneous Electrical Machinery, Equipment,
Industry Electronic Instr. & Controls
Sector Technology
Fiscal Year 07/31
http://www.edgar-online.com
© Copyright 2010, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
For the fiscal year ended September 30, 2009
Commission File Number 000-49962
NEAH POWER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: ( 425 ) 424-3324
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common stock, $0.001 par value per share
(Title of Each Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No ?
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes

No ?
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ? No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check One).
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company ?
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No ?
The aggregate market value of the Registrant’s common stock held by non-affiliates was approximately $1,279,000 as of March 31, 2009 based
upon the closing price of common stock on March 31, 2009.
As of January 11, 2010, there were 36,592,730 million shares of the Registrant’s $0.001 par value common stock outstanding.
? ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Nevada 88-0418806
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
22118 20th Ave SE, Suite 142, Bothell, Washington 98021
(Address of principal executive offices) (Zip Code)
NEAH POWER SYSTEMS, INC.
TABLE OF CONTENTS
Page
Explanatory Note 1
Forward-Looking Statements 1
PART I.
Item 1. Business 2
Item 1.B Unresolved Staff Comments 8
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39
Item 9A(T). Controls and Procedures 39
Item 9B. Other Information 40
PART III.
Item 10. Directors, Executive Officers and Corporate Governance 41
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 47
Item 13. Certain Relationships and Related Transactions and Director Independence 49
Item 14. Principal Accountant Fees and Services 50
PART IV
Item 15. Exhibits and Financial Statement Schedules 50
SIGNATURES 51
Explanatory Note
As used herein, (a) the terms “Neah Power,” “Company,” “we,” “our” and like references mean and include both Neah Power
Systems, Inc., a Nevada corporation (formerly, Growth Mergers, Inc.), and our wholly-owned subsidiary, Neah Power Systems, Inc., a
Washington corporation, on a combined basis, (b) the term, “Neah Power Washington” refers only to the Washington corporation. Except as
otherwise expressly indicated, all references to shares of capital stock, notes, warrants, options and other outstanding securities mean securities
only of the Nevada corporation.
Forward Looking Statements
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Specifically, all statements other than statements of historical facts included in this annual report
regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking
statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information
currently available to management. When used in this annual report, the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,”
“continue” and “intend,” and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or
objectives of management, are intended to identify forward-looking statements.
These statements reflect our current view with respect to future events and are inherently subject to risks and uncertainties, many of
which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that such expectations will
be achieved. Future events and actual results, financial and otherwise, may differ materially from those expressed in the forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-looking statements. We have no duty to update or revise any
forward-looking statements after the date of this Annual Report on Form 10-K and the documents incorporated herein by reference or to
conform them to actual results, new information, future events or otherwise.
The following factors, among others, could cause our or our industry’s future results to differ materially from historical results or
those anticipated:
These factors are the important factors of which we are currently aware that could cause actual results, performance or achievements to differ
materially from those expressed in any of our forward looking statements. We operate in a continually changing business environment and
new risk factors emerge from time to time. Other unknown or unpredictable factors could have material adverse effects on our future results,
performance or achievements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not
occur.
· general economic conditions;
· our future capital needs and our ability to obtain financing;
· our ability to obtain governmental approvals, including product and patent approvals;
· the success or failure of our research and development programs;
· the acceptance and success of our fuel cell products;
· our ability to develop and commercialize or products before our competitors; and
· our limited operating history
1
PART I
ITEM 1: BUSINESS
Overview
We are engaged in the development and sale of renewable energy solutions. Our fuel cells are designed to replace existing
rechargeable battery technology in mobile electronic devices and small-scale transportation vehicles. Our long-lasting, efficient and safe power
solutions for these devices, such as notebook PCs, military radios, and other power-hungry computer, entertainment and communications
products, use our patented, silicon-based design with higher power densities to enable lighter-weight, smaller form-factors and potentially
lower costs. Through our recent agreement to acquire SolCool One, LLC (“SolCool”), we also intend to expand our portfolio of renewable
energy solutions. SolCool is a leading supplier of direct current (“DC”) air-conditioning systems for off-the-grid applications. We intend to
utilize SolCool’s worldwide distribution network and developed market to facilitate the adoption of fuel cells and Remote Area Power Supplies
(“RAPS”), or integrated power solutions, for similar applications of our fuel cell products.
Based on our research and testing, we believe our team of world-class engineers and scientists can continue to develop a commercially
viable fuel cell that will outperform lithium ion batteries and other batteries in terms of run time, recharge time, portability and other measures
of battery performance. Our fuel cell solution is particularly beneficial in applications currently requiring the use of more than one battery,
since the user will only need to carry a single fuel cell with a supply of additional cartridges resulting in reduced burden. We have developed
what we believe is a potential breakthrough in the development of a direct methanol micro fuel cell, which may serve as a replacement for
batteries in a variety of products. Based on our seven issued patents and 4 additional U.S. patent filings, we believe our technology is
proprietary and can be protected.
In 2009 we continued to advance the development of our technology. This included the completion of our fuel cell prototype and the
subsequent completion of a system not requiring the availability of oxygen from the environment (“anaerobic” or “closed loop system”). We
also demonstrated an air-breathing (“aerobic”) system. We expect the prototype and the related technology to form the foundation for future
fuel cell products that we plan to further develop and sell to customers over the next fiscal year.
During 2009, we received payments of approximately $1,147,000 from the Office of Naval Research (“ONR”) pursuant to the terms
of a grant providing expense reimbursement for continuing research and development (“R&D”) having to do with certain technology. This
system was successfully developed and demonstrated to the ONR in September 2009.
We have announced customer relationships with EKO Vehicles of Bangalore (“EKO”) and Hobie Cat Company (“Hobie Cat”) to
develop early production devices that can be evaluated by original equipment manufacturers (“OEM’s”) for the eventual deployment of fuel
cell products that we or potential licensees will use to manufacture products for sale to our partners, distributors or OEM customers. We also
intend to design and distribute the fuel cartridge that our fuel cells require for refueling. We expect to generate future revenues from the sale
and licensing of both fuel cartridges and the completed fuel cells. Our current business plan contemplates that we will subcontract to third
parties substantially all of the production and assembly. Prototype development continues and we expect to make our energy products
commercially available in fiscal 2010.
Background
Neah Power Systems, Inc. was incorporated in the State of Nevada on February 1, 2001 under the name Growth Mergers, Inc.
Effective March 9, 2006, Growth Mergers, Inc. entered into an Agreement and Plan of Merger, as amended on April 10, 2006, whereby
Growth Acquisitions, Inc., a Washington corporation and wholly-owned subsidiary of Growth Mergers, Inc., merged with and into Neah Power
Washington. Following the merger, Growth Mergers, Inc. changed its corporate name from Growth Mergers, Inc. to Neah Power Systems, Inc.
By virtue of this merger, Growth Mergers, Inc. (as Neah Power Systems, Inc.) became the parent corporation of Neah Power Washington.
2
The purpose of the merger was to enable Neah Power Washington, as Growth Mergers, Inc.’s subsidiary, to access the capital markets
via a public company. Our common stock currently trades on the OTC Bulletin Board under the symbol “NPWZ.” We intend to pursue a
qualification on the American Exchange, but there is no assurance that we will qualify for quotation on a national securities association or
exchange.
SolCool One, LLC Acquisition
On July 27, 2009, and amended September 19, 2009, we entered into a first amended and restated agreement and plan of merger (the
“Amended Merger Agreement”) with SolCool, Neah Power Acquisition Corp. (“Merger Sub”), our wholly-owned subsidiary, and Mark Walsh,
manager and founder of SolCool, pursuant to which the Merger Sub will be merged into SolCool (the “Merger”).
Under the terms of the Amended Merger Agreement, we will issue $500,000 of common stock, or 476,000 shares of common stock, at
a price of $1.05 per share, such shares of common stock to vest as follows: (i) 50% upon execution and the remaining 50% 24 months from
date of the Amended Merger Agreement, such vesting contingent upon Mark Walsh remaining as our employee and using his best efforts to
achieve SolCool’s business plan, and (ii) pay $100,000 to fund SolCool’s operations and shipments. In August 2009, we paid $10,000 towards
the cash payment obligation. In October 2009, we issued the initial payment of 238,000 shares. 238,000 additional common shares were issued
in October 2009 and will be held in escrow to ensure best-effort execution of SolCool’s obligations under the Amended Merger Agreement.
The closing of the merger is subject to other customary closing conditions including the filing of the articles of merger with the applicable
states. For accounting purposes the acquisition was not completed before September and thus has not been reflected in the consolidated
financial statements.
SolCool’s existing worldwide distribution infrastructure could provide us with a distribution channel to distribute our products
worldwide. We also anticipate using some of the energy generation, storage, and regulation expertise from SolCool to create new product
offerings for energy generation and storage.
RESEARCH AND DEVELOPMENT
We conduct our research and development activities at our headquarters in Bothell, Washington. We plan to invest in research and
development and anticipate that our R&D costs will increase in 2010 compared to prior years due to the anticipated increase in product
development related to technology improvements and specific customer products.
Our Unique Patented Technology
Rather than joining numerous other companies attempting to create Proton Exchange Membrane (“PEM”)-based direct methanol fuel
cells (“DMFC”s), we felt an entirely new design approach was necessary to achieve the power capacity and reliability required by portable
electronic devices. Our unique fuel cell design utilizes a patented porous silicon electrode structure and circulating liquid streams of fuel,
oxidant and electrolyte that produce the chemical reactions needed to generate power. We believe our use of porous silicon and liquid oxidant
is unique in the fuel cell industry. In final form, our products can be packaged in plastic casings to create self-contained systems that retain the
excess water produced during operation and prevent contamination to the cathode as occurs in traditional PEM-based DMFCs. Furthermore,
since our design is based largely on standard silicon wafer processing, we believe that it should have significant manufacturing advantages over
traditional fuel cells. Compared to competing DMFC technologies that use carbon-based electrodes and solid PEM’s, we believe that our
approach will deliver higher power output and lower cost for the equivalent size of fuel cell. We also believe that our fuel cells will be more
reliable and operate in a broader range of environments. We believe that our ability to use silicon electrodes, leverage the cost benefits of
semiconductor manufacturing, and contain all chemical reactants within the fuel cell will give us distinct competitive advantages.
3
Porous Silicon Electrodes
Our electrode architecture uses conductive porous silicon as the catalyst support structure rather than carbon typically used in fuel
cells. Using a silicon wafer commonly used in the semiconductor industry, we etch a pattern of millions of microscopic pores into the silicon.
A conductive film is then applied to the surface of the pore walls followed by a catalyst coating over the conductive film. The process can be
used to produce either anode or cathode electrodes depending on the type of catalyst used. The final result is a porous electrode that enables a
larger reactive surface area to generate more power.
While our focus has been on the closed loop non–air (“anaerobic”) systems, in 2009, we also demonstrated an aerobic system which
could be used where the quality of the air is high and predictable. This would reduce the complexity of the system, as well as increase the
energy density of the system.
Comparison Between Porous Silicon Fuel Cells and PEM-Based Designs
We believe that the principal advantages of our approach over PEM-based designs include:
We believe that the principal disadvantages of our approach consist of the following factors:
As an ongoing effort to increase the competitiveness of our product, we must focus on the following areas:
• Our use of porous silicon electrodes and the liquid electrolyte, eliminate a range of possible failure modes that have
hampered introduction of PEM based systems. These include degradation of the PEM membrane, crossover of methanol fuel
and degradation of the cathode catalyst, damage to the cathode catalyst by exposure to airborne contaminants such as sulfur;
and flooding or alternatively drying out of the cathode catalyst. We believe that these advantages will allow our fuel cells to
operate in a broader range of environmental conditions, in all orientations, with high reliability.
• The use of silicon technology allows us to make use of existing silicon production infrastructure, with reduced need to create
specialized production facilities. We can also use standard silicon technology to optimize the dimension of the pores for high
power, while reducing the thickness to reduce cost and overall dimensions of the fuel cell.
• The larger reaction area, coupled with the use of oxidizer at the cathode, leads to greater available power density, which
reduces the size and cost of the fuel cell system.
• Our technology allows us to create alternative product designs that do not require interactions with the environment for
operation. This allows us to extend our fuel cell products to applications like sensor networks that require operation without
breathing air or expelling gases.
• The design of the fuel cell avoids conflicts with numerous patents and is itself patented by us.
• Water created in the fuel cell reaction is retained in the fuel cartridge, not vented where it can damage the host device.
• Our approach requires both the fuel cell and the cartridge to contain acids at corrosive concentrations. It is therefore
important to ensure that users of the technology are not brought into contact with these acids and that additional steps be
taken to ensure that the lifetime of the system is adequate.
• The need to select materials compatible with the chemistry.
• Increase the volumetric power density over the power density currently available in our fuel cells - this will enable us to build
more compact solutions
4
COMMERCIALIZATION STRATEGY
We are focusing our initial strategy on the market for fuel cells for use in anaerobic or low oxygen content environments, such as
under water, aerospace and military applications. Both EKO and Hobie Cat currently have electric drive consumer products where power
capacity is limited by the need for extensive battery re-charging. Implementation of a fuel cell could enable continuous operation of these
electric drive vehicles by the use of fuels cells with supplies of fuel cartridges. Also, competing PEM-based fuel cells could have significant
operational limitations when environments contain diesel fumes or high humidity. We expect that partnerships with EKO, Hobie Cat and other
potential customers will enable us to validate our product, supply chain and overall product strategy.
Beyond these initial markets, we intend to pursue the military, industrial and consumer markets, since we believe our product can also
provide significant benefits within these business segments.
The Fuel Cell Market
Fuel cells can be categorized by the market applications they potentially serve and by their power output. We are focused on providing
an alternative to conventional batteries for portable electronic devices that typically operate in the 5-1000+ Watt range. Specifically, we are
targeting military, industrial and consumer markets with potential applications for computer, electronic media as well as products for military
and homeland security electronic equipment.
These segments of the fuel cell market include low power systems (less than 10 Watts) for low power devices and trickle chargers,
and higher power systems (greater than 100 Watt) typically aimed at stationary power generation or vehicle power plants. In particular, our
technology may provide some unique advantages over batteries and other types of fuel cells in harsh environments or where access is limited or
unavailable.
Our target market segment has a number of specific requirements and unique challenges. To succeed in this segment, fuel cells must
have a high power density (high wattage for their size and weight), be relatively insensitive to the quality of the surrounding air and be cost
effective. They must also be safe, easily portable, and efficient. The fuel cells must be transportable and operate reliably in a wide range of
environmental conditions.
Within the 10-100 watt battery replacement space, the dominant technology direction over the last 30 years has been the ongoing
development of fuel cells based on PEM. A PEM is usually a polymeric structure resembling a thin sheet of plastic that conducts protons,
acting as a solid state electrolyte for electrochemical reactions. Typical PEM based fuel cells use this material as a basic building block of the
electrochemical power generation unit. PEM -based solutions may use either the oxidation of hydrogen gas as the fuel source or the direct
oxidation of liquid methanol in the DMFC configuration.
• Complete development of manufacturing techniques for fuel cell and fuel cartridge assembly, allowing the unit to meet
relevant specifications (such as those of the Underwriters’ Laboratories) that are required by many customers;
• Further develop manufacturing techniques for key components of the fuel cells and locate suitable manufacturing partners or
subcontractors; and
• Reduce the gold and platinum precious metal content of the fuel cells from present levels according to a staged program in
order to meet our production cost objectives.
• Improve the aerobic solution that will provide higher energy density for aerobic applications, while leveraging other
capabilities from our anaerobic system
5
The commercial development of PEM-based solutions has been hampered by a number of technical issues. Performance of these PEM
membranes is highly dependent on maintaining tight environmental control of the operating conditions which has been difficult to achieve in
product based designs. Longevity of the PEM based systems has also been a challenge with membrane and catalyst degradation issues limiting
the operating life of the systems. Finally, PEMs are expensive to manufacture because they use costly proprietary materials and because the
industry has not been able to develop the scalable low-cost manufacturing processes that are needed for the unique PEM fuel cell requirements.
Remote Area Power Supplies (“RAPS”) Market
After the completion of the SolCool acquisition, we anticipate building on SolCool’s expertise to create RAPS which can provide
1kW to 10+ kW power systems that can operate off-the-grid. These systems would include a renewable, DC-based generation system (solar,
wind, etc.), a power modulation system (DC-DC converter, DC-AC inverter) and storage systems. We expect increasing demand based on the
current focus on renewable energy, and the need to reduce dependence on a depleting resource (fossil fuels) and, based our internal marketing
estimates and reports published by the marketing research firm of Frost and Sullivan, this market is estimated to be in the range of $15 billion
to $20 per year. In addition, RAPS products could provide backup power for critical infrastructure like cell phone towers, communication
infrastructure and other command and control systems in developed countries.
Market for Military Applications
Our R&D efforts to date have demonstrated the potential use of our fuel cells in a variety of military applications. The technology has
the potential to provide longer power duration at significantly reduced size and weight. In addition, we believe our fuel cells may provide an
environmentally friendly solution compared to rechargeable or non-rechargeable batteries. Our products particularly address anaerobic needs
such as underwater, underground, close quarters and high altitude and no atmosphere applications specific to military needs.
We believe that the market for military applications will be greater than $2 billion per year, as reflected in market research by Frost
and Sullivan, as well as our internal marketing estimates. This market includes fuel cell replacements for batteries, fuel cell power sources for
specialized applications like underwater and/or unmanned vehicles and backup power supplies.
Office of Naval Research - During the year ended September 30, 2009, we received payments of approximately $1,147,000 from the
Office of Naval Research (“ONR”) pursuant to the terms of a grant providing expense reimbursement for continuing research and development
having to do with certain technology. This contract included various technical developments, and the demonstration of a closed loop, self
contained, anaerobic system. This system was successfully developed and demonstrated to the ONR in September 2009.
Other - We were party to a development agreement with a customer to develop proof-of-concept fuel cell power source prototypes
(Phase I) and, if successful and elected by the customer, the development of fuel cell power sources (Phase II). We received $344,000 for
certain services in Phase I and recognized revenue of $154,500 for the completion of the initial Phase I requirement in 2004 and deferred the
balance of $189,500 until the related services were rendered and the final Phase I milestone was reached. We believe the final Phase I
milestone was reached in 2009. However, customer acceptance has not yet occurred and the balance of $189,500 has not yet been recognized
as revenue.
Market for Industrial Applications , RAPS, and Transportation
We are currently developing RAPS that are renewable energy, fuel cell-based power generation and storage systems that can be used
for distributed power applications where the quality of the electrical grid is non-existent or sub–par, or where back up power is needed.
In July 2009 we signed a Letter of Intent (“LOI”) with EKO, one of India’s larger manufacturers of electric two wheel vehicles, to
develop fuel cell battery charging units for integration into their electric scooters, as well as RAPS to act as charging stations for the scooters
and off -grid power sources. With sufficient funding, we expect to deliver several beta prototype units in 2010 and after successful evaluation
we expect to ship several hundred units.
6
In July 2009 we signed a technology license agreement with Hobie Cat to explore the use of our proprietary fuel cells to power
various recreational water craft products. Additionally, we signed a LOI with Hobie Cat to produce on-board fuel cell battery chargers for their
line of electric kayaks. With sufficient funding, we anticipate delivery of several beta prototype systems in 2010, and several hundred systems
after successful completion of the beta evaluations.
Market for Consumer Mobile Electronics
Recent trends continue to demonstrate a clear need for better and longer-lasting power solutions to close the “power gap,” which is
defined as the difference between the power capacity and the power need, thus enhancing mobility and productivity. Based on user demand,
mobile electronic companies continue to add features for richer experiences. Notebook PC makers, for example, in recent years have enhanced
their products with larger, more vivid color displays, faster processors, larger hard drives, DVD and/or CD drives, as well as multimedia and
wireless networking capabilities. Each of these additions requires more power and, taken together, can be a significant drain on the PCs limited
battery capacity. Users are also more dependent on these mobile devices and using them longer without access to A/C power compounds the
power gap. Sales of notebook PCs continue to grow faster than those of the overall PC market, and now represent more than half of all PCs
sold. The size of the consumer market is estimated to be between $6 billion and $8 billion per year, as reflected in market research by Frost and
Sullivan and our internal marketing estimates, with no clear incumbent solution. Moreover, with the growth and widespread availability of
high-speed wireless connections (Wi-Fi) in corporate offices and public locations, “persistent” computing - constant connectivity to the
Internet, e-mail and corporate files - is becoming commonplace, creating additional demands for longer-lasting power.
We believe that our fuel cells, when fully developed, will be capable of bridging the power gap by having more power, a longer life
and instant recharge capability using replacement fuel cartridges. In addition, we believe that they will be smaller and lighter-weight than the
batteries currently in use.
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY
We rely primarily on patents and contractual obligations with employees and third parties to protect our proprietary rights. We intend
to seek appropriate patent protection for our proprietary technologies by filing patent applications in the U.S. and in certain foreign
countries. As of December 31, 2009, we owned or controlled seven issued or allowed U.S. patents and four pending U.S. patent applications,
including provisional patent applications.
Our patents and patent applications are directed to the components and systems involved in our fuel cell design and the use of porous
substrates coated with catalyst as fuel cell electrodes and electrode structures, cell bonding techniques, and cartridges Our financial success
will depend in large part on our ability to:
In addition, we believe our fuel cell design and technology are not in conflict with the U.S. patents covering PEM-based DMFCs held
by several organizations.
· obtain patent and other proprietary protection for our intellectual property;
· enforce and defend patents and intellectual property once obtained;
· operate without infringing on the patents and proprietary rights of third parties; and
· preserve our trade secrets;
7
EMPLOYEES
As of December 31, 2009, we had thirteen employees, including two executive officers, eight persons in research and development
and two clerical and administrative personnel.
COMPETITION
The development and marketing of fuel cells and fuel cell systems is extremely competitive. In many cases, we compete directly with
alternative energy and entrenched power-generation and power-storage technologies. In addition, a number of firms throughout the world have
established fuel cell development programs, albeit most of them PEM-based. Competitors range from development stage companies to major
domestic and international companies, many of which have:
These or other companies may succeed in developing and bringing to market products or technologies that are more cost-effective than those
being developed by us or that would render our products and technology obsolete or non-competitive in the marketplace.
AVAILABLE INFORMATION
We are a reporting company and file annual, quarterly and special reports, and other information with the SEC. You may read and
copy these reports at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
or email the SEC at [e-mail] for more information on the operation of the public reference room. Our SEC filings are also
available at the SEC’s website at http://www.sec.gov .
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2: Properties.
The following is a summary of our property and related lease obligation. We do not own any real property. We believe that these
facilities are sufficient to support our research and development, operational and administrative needs under our current operating plan.
We currently lease both our corporate headquarters and laboratory facilities under a lease agreement which expired March 31, 2009
and was extended through September 30, 2009. We currently lease on a month-to-month basis, and intend to negotiate with the landlord for a
lease extension.
ITEM 3: Legal Proceedings .
Our landlord has filed a claim for unpaid rent in the amount of $76,069 in a case styled Teachers Insurance & Annuity v. Neah Power
Systems, Inc. in the Superior Court of the State of Washington, County of King, and was granted a default judgment in December 2009 in the
amount of $81,866. Pursuant to that judgment, in January 2010 we received a notice of eviction from our landlord for the unpaid rent. We hope
to avoid eviction by payment of the past-due rent prior to the notice response date of January 21, 2010.
• substantially greater financial, technical, marketing and human resource capabilities;
• established relationships with original equipment manufacturers;
• name-brand recognition; and
• established positions in the markets that we have targeted for penetration.
8
A consultant of the Company obtained a default judgment in December 2009 in the amount of $62,524 in a case styled Novellus
Systems, Inc. v. Neah Power Systems, Inc. in the Superior Court of California, County of Santa Clara.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None.
9
PART II
ITEM 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on the Over-the-Counter Bulletin Board under the symbol "NPWZ." Set forth below are the range of high
and low bid quotations for the periods indicated as reported by the OTCBB. The market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual transactions.
On July 27, 2009, we effected a 200:1 reverse stock split of all issued and outstanding shares of our common stock. On August 14,
2009, we effected a 6:1 forward split of all issued and outstanding shares of our common stock. This schedule reflects those changes to the
historical prices.
The last sale price of our common stock on December 31, 2009, was $0.60.
Holders
As of December 31, 2009, there were approximately 350 holders of record of our common stock. This number does not include beneficial
owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
Dividends
We have not paid any cash dividends to date and do not anticipate or contemplate paying dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for the development of our business.
Unregistered Sales of Equity Securities
The following sets forth certain information for all securities we sold during the fiscal year ended September 30, 2009 without
registration under the Securities Act of 1933, as amended, other than those sales previously reported in a Current Report on Form 8-K or a
Quarterly Report on Form 10-Q:
High Low
Fiscal Year Ended September 30 2007:
First Quarter (October 1, 2006 – December 31, 2006) $ 68.33 $ 25.00
Second Quarter (January 1, 2007 – March 31, 2007) 61.33 28.67
Third Quarter (April 1, 2007 – June 30, 2007) 34.00 14.00
Fourth Quarter (July 1, 2007 – September 30, 2007) 22.00 6.67
Fiscal Year Ended September 30, 2008:
First Quarter (October 1, 2007 – December 31, 2007) $ 12.33 $ 5.50
Second Quarter (January 1, 2008 – March 31, 2008) 7.00 0.83
Third Quarter (April 1, 2008 – June 30, 2008) 3.08 0.77
Fourth Quarter (July 1, 2008 – September 30, 2008) 1.00 0.08
Fiscal Year Ended September 30, 2009:
First Quarter (October 1, 2008 – December 31, 2008) $ 0.33 $ 0.08
Second Quarter (January 1, 2009 – March 31, 2009) 0.27 0.12
Third Quarter (April 1, 2009 – June 30, 2009) 8.93 0.12
Fourth Quarter (July 1, 2009 –September 30, 2009) 5.27 0.93
10
In September 2009, we issued 24,000 warrants to purchase shares of our common stock at $1.05 per share to DNA Global for business
development services provided. The warrants are exercisable until September 2010. In August 2009, we issued 120,000 warrants to purchase
shares of our common stock at $2.08 per share to Aaron Grunfeld for legal services provided. The warrants are exercisable until August 2014.
In July 2009, we issued 26,000 warrants to purchase shares of our common stock at $0.29 per share to Biomed Capital for fees paid to
investment bank for assistance in raising capital. These warrants were exercised in November 2009. In July 2009, we issued 3,000 warrants to
purchase shares of our common stock at $0.29 per share to Moody Capital for fees paid to investment bank for assistance in raising capital. The
warrants are exercisable until July 2010.
In February 2009, we entered into a Securities Purchase Agreement with each of Agile Opportunity Fund, LLC (“Agile”) and
Capitoline Advisors, Inc. (“Capitoline”) under which we were to receive funding through the issuance of convertible promissory notes (“the
Notes) in the aggregate amount of $1,050,000 and an aggregate purchase price of $900,000, with a maturity date of August 12, 2009 and
prepaid interest at the rate of 18% per annum. The Notes are convertible into shares of our common stock at a conversion price of $3.33 per
share, at the discretion of the creditor, subject to adjustment to conversion price if subsequent sales of our common stock are issued at a price
lower than the conversion price. The Notes are subject to mandatory redemption in the event we enter into a going private transaction or we are
sold. The Notes are secured by all our assets and, upon conversion, have certain piggyback registration rights. In February, March and June
2009, we received funds from Agile pursuant to these agreements in the aggregate face amount of $635,000, and aggregate purchase price
amount of $550,000. In consideration for the Notes, approximately 3,372,000 common shares are issuable under the terms of the
agreement. As of September 30, 2009, the Notes were unpaid and past-due. We are negotiating with Agile on forbearance. However, there is
no assurance that Agile will grant forbearance or refrain from taking actions against us available to them under the agreement.
In July, August and September 2009, we received funds from Capitoline in the aggregate face amount of $321,000 and aggregate
purchase price amount of $275,000. In consideration for the Notes, approximately 117,164 common shares are issuable under the terms of the
agreement. As of the date of this report, the principal balances of the Notes remain unpaid and past-due. We are negotiating with Capitoline on
forbearance. However, there is no assurance that Capitoline will grant forbearance or refrain from taking actions against us available to them
under the agreement.
Description of Equity Incentive Compensation Plans
The table below sets forth certain information as of September 30, 2009 regarding the shares of common stock available for grant or
granted under our long-term incentive plans that were (i) approved by our stockholders, and (ii) were not approved by our stockholders:
Equity Incentive Compensation Plan Information
Number of
Common shares
to be Issued
Upon Exercise
of Outstanding
Options
Weighted-
Average
Exercise Price
of Outstanding
Options
Number of Common
Shares Remaining for
Future Issuance Under
Long-Term Incentive
Equity Compensation Plan
(Excluding Outstanding
Options)
Equity compensation plans approved by stockholders 2,862,745 $ 1.31 3,137,255
Equity compensation plans not approved by stockholders —
Total 2,862,745 $ 1.31 3,137,255
11
Long Term Incentive Compensation Plan - In August of 2008, we amended our Long Term Incentive Compensation Plan (“the Plan”)
first adopted in March 2006. Under the amended Plan, the maximum number of shares issuable is 6,000,000. The Plan is to continue for a term
of ten years from the date of its adoption. The Plan is administered by our board of directors. We have outstanding stock options for 2,862,745
shares to employees, the board of directors, and advisors and consultants, and none of these options have as of yet been exercised. Options are
exercisable for ten years from date of grant. Options granted in excess of 6,000,000 will require shareholder approval. For the years ended
September 30, 2009 and 2008, there were 2,841,700 and nil stock options issued, respectively, under the amended Plan.
Employee Stock Purchase Plan - In August 2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase Plan”). The
number of shares of common stock that may be sold pursuant to the Stock Purchase Plan shall not exceed, in the aggregate, 900,000 shares of
our common stock. As of September 30, 2009, no shares have been purchased under the Stock Purchase Plan.
12
ITEM 7: Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Overview
Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the
Securities Act, and Section 21E of the Exchange Act, that are subject to a variety of risks and uncertainties. There are a number of important
factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statement made by
us. These factors include, but are not limited to: (i) general economic conditions; (ii) our future capital needs and our ability to obtain
additional funding; (ii) our ability to obtain required governmental approvals, including product and patent approvals; (iii) our ability to
successfully complete product research and development and commercialization; and (iv) our ability to develop and commercialize products
that can compete favorably with those of competitors. In addition, significant fluctuations in annual or quarterly results may occur as a result
of the timing of milestone payments, the recognition of revenue from milestone payments and other sources not related to product sales to third
parties, and the timing of costs and expense related to our research and development programs. Additional factors that would cause actual
results to differ materially from those projected or suggested in any forward-looking statements are contained in our filings with the SEC,
including those factors discussed under the caption “Forward-Looking Statements” in this Report, which we urge investors to consider. We
undertake no obligation to publicly release revisions in such forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrences of unanticipated events or circumstances, except as otherwise required by securities and
other applicable laws.
The following management’s discussion and analysis is intended to provide information necessary to understand our
audited consolidated financial statements and highlight certain other financial information, which in the opinion of management, will enhance
a reader’s understanding of our financial condition, changes in financial condition, and results of operations. In particular, the discussion is
intended to provide an analysis of significant trends and material changes in our financial condition and operating results during the fiscal year
ended September 30, 2009 as compared to the fiscal year ended September 30, 2008. This Item is organized as follows:
Background
We are engaged in the development and sale of renewable energy solutions. Our fuel cells are designed to replace existing
rechargeable battery technology in mobile electronic devices and small-scale transportation. Our long-lasting, efficient and safe power
solutions for these devices, such as notebook PCs, military radios, and other power-hungry computer, entertainment and communications
products, use our patented, silicon-based design with higher power densities to enable lighter-weight, smaller form-factors and potentially
lower costs. Through our recent agreement to acquire SolCool, we also intend to expand our portfolio of renewable energy solutions. SolCool
is a leading supplier of direct current (“DC”) air-conditioning systems for off-the-grid applications. We intend to utilize SolCool’s worldwide
distribution network and developed market to facilitate the adoption of fuel cells and RAPS, or integrated power solutions, for similar
applications of our fuel cell products.
· The section entitled “Background” describes our principal operational activities and summarizes significant trends and
developments in our business and in our industry.
· “Critical Accounting Policies and Estimates” discusses our most critical accounting policies and estimates.
· “Recently Issued Accounting Pronouncements ” discusses new accounting standards.
· “Liquidity, Capital Resources and Going Concern” discusses our cash requirements, sources and uses of cash and liquidity,
including going concern qualifications.
· “Comparison of Annual Results of Operations” discusses the primary factors that are likely to contribute to significant
variability of our results of operations for the fiscal year ended September 30, 2009 as compared to September 30, 2008.
· “Off-Balance Sheet Arrangements” indicate that we did not have any off-balance sheet arrangements as of September 30,
2009.
13
Based on our research and testing, we believe our team of world-class engineers and scientists can continue to develop a commercially
viable fuel cell that will outperform lithium ion batteries and other batteries in terms of run time, recharge time, portability and other measures
of battery performance. Our fuel cell solution is particularly beneficial in applications currently requiring the use of more than one battery,
since the user will only need to carry a single fuel cell with a supply of additional cartridges resulting in reduced burden. We have developed
what we believe is a potential breakthrough in the development of a direct methanol micro fuel cell, which may serve as a replacement for
batteries in a variety of products. Based on our seven issued patents and four additional U.S. patent filings, we believe our technology is
proprietary and can be protected.
In 2009 we continued to advance the development of our technology. This included the completion of our fuel cell prototype and the
subsequent completion of a system not requiring the availability of oxygen from the environment (“closed loop system”). We also
demonstrated an air-breathing (“aerobic”) system. We expect the prototype and the related technology to form the foundation for future fuel
cell products that we plan to further develop and sell to customers over the next fiscal year.
During 2009, we received payments of approximately $1,147,000 from ONR pursuant to the terms of a grant providing expense
reimbursement for continuing R&D having to do with certain technology. This system was successfully developed and demonstrated to ONR
in September 2009.
We have announced customer relationships with EKO and Hobie Cat to develop early production devices that can be evaluated by
original equipment manufacturers (“OEM’s”) for the eventual deployment of fuel cell products that we or potential licensees will use to
manufacture products for sale to our partners, distributors or OEM customers. We also intend to design and distribute the fuel cartridge that our
fuel cells require for refueling. We expect to generate future revenues from the sale and licensing of both fuel cartridges and the completed fuel
cells. Our current business plan contemplates that we will subcontract to third parties substantially all of the production and assembly.
Prototype development continues and we expect to make our energy products commercially available in fiscal 2010.
SolCool One, LLC Acquisition
On July 27, 2009, and amended September 19, 2009, we entered into the Amended Merger Agreement with SolCool, Merger Sub, our
wholly-owned subsidiary, and Mark Walsh, manager and founder of SolCool, pursuant to which the Merger Sub will be merged into SolCool
(the “Merger”).
Under the terms of the Amended Merger Agreement, we will issue $500,000 of common stock, or 476,190 shares of common stock, at
a price of $1.05 per share, such shares of common stock to vest as follows: (i) 50% upon execution and the remaining 50% 24 months from
date of the Amended Merger Agreement, such vesting contingent upon Mark Walsh remaining our employee and using his best efforts to
achieve SolCool’s business plan, and (ii) pay $100,000 to fund SolCool’s operations and shipments. In August 2009, we paid $10,000 towards
the cash payment obligation. In October 2009, we issued the initial payment of 238,000 shares. 238,000 additional common shares were issued
in October 2009 and will be held in escrow to ensure best-effort execution of SolCool’s obligations under the Amended Merger Agreement.
The closing of the merger is subject to other customary closing conditions including the filing of the articles of merger with the applicable
states. For accounting purposes the acquisition was not completed before September and thus has not been reflected in the consolidated
financial statements.
SolCool’s existing worldwide distribution infrastructure could provide us with a distribution channel to distribute our products
worldwide. We also anticipate using some of the energy generation, storage, and regulation expertise from SolCool to create new product
offerings for energy generation and storage.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the use of estimates that affect the reported amounts of assets, liabilities and expenses.
Our critical accounting policies include revenue recognition, accounting for research and development costs, accounting for contingencies,
accounting for income taxes, and accounting for share-based compensation. Other key estimates and assumptions that affect reported amounts
and disclosures include depreciation and amortization and expense accruals. We base our estimates on historical experience and on actual
information and assumptions that are believed to be reasonable under the circumstances at that time. Actual results may differ from these
estimates under different assumptions or conditions. We believe that the following critical accounting policies affect our more significant
estimates used in the preparation of our financial statements.
14
Revenue Recognition
Revenue normally consists of grant and contract revenues. We recognize revenue when we have persuasive evidence of an
arrangement, the services have been provided to the customer, the price for services is fixed and determinable, no significant unfulfilled
obligations exist, and collectability is reasonably assured.
Grant revenues are recognized as the related research is conducted. Contract revenues consist of amounts recorded from services
provided to a single customer. Revenues earned under such arrangements are recorded as earned either as milestones are achieved or as the
services are provided. Upfront payments received under contractual arrangements are deferred and recognized as revenue over the service
period.
Share Based Payments
We use the Black-Scholes option pricing model as our method of valuation for share-based awards. Share-based compensation
expense is recorded over the requisite service period typically and based on the value of the portion of the stock-based award that will vest
during the period, adjusted for expected forfeitures. Our determination of the fair value of share-based awards on the date of grant using an
option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to, the expected life of the award, expected stock price volatility over the term of the award and
historical and projected exercise behaviors. The estimation of share-based awards that will ultimately vest requires judgment, and to the extent
actual or updated results differ from our current estimates, such amounts will be recorded in the period estimates are revised. Although the fair
value of share-based awards is determined in accordance with authoritative guidance, the Black-Scholes option pricing model requires the input
of highly subjective assumptions and other reasonable assumptions could provide differing results. Non-cash compensation expense is
recognized on a straight-line basis over the applicable vesting periods of one to ten years, based on the fair value of such share-based awards on
the grant date.
Income Taxes
We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of assets and liabilities and on the expected future tax benefits to be derived
from net operating loss carryforwards measured using current tax rates. A valuation allowance is established if it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Due to the nature of the reverse merger that occurred in 2006 and the resulting
greater than 50% change in control, our ability of to utilize NOL carryforwards from NPSWA may be limited.
Recently Issued Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on revenue arrangements with
multiple deliverables that are outside the scope of the software revenue recognition guidance (which does not have impact on our
accounting). Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement
cannot be determined, a best estimate of a selling price is required to separate deliverables and allocate arrangement consideration using the
relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition. We believe adoption of this new guidance will not have a material effect on our
consolidated financial statements.
15
In June 2008, the Emerging Issues Task Force of the FASB issued authoritative guidance on accounting for convertible instruments and
warrants with provisions that protect holders from declines in the stock price (“down-round” provisions), which is effective for us beginning
October 1, 2009. Instruments with such provisions will no longer be recorded in equity. The guidance is to be applied to outstanding
instruments as of the beginning of the fiscal year in which the guidance is applied. The cumulative effect of the change in accounting principle
shall be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal
year, presented separately. The cumulative-effect adjustment is the difference between the amounts recognized in the statement of financial
position before initial application of authoritative guidance and the amounts recognized in the statement of financial position upon its initial
application. The amounts recognized in the statement of financial position as a result of the initial application are determined based on the
amounts that would have been recognized if the guidance had been applied from the issuance date of the instrument. In connection with the
warrants issued in connection with the Agile and Capitoline agreements, which have such down-round protection provisions, we are assessing
the impact of adoption of this guidance on our consolidated financial position and results of operations.
In December 2007, the FASB issued authoritative guidance on business combinations to be applied prospectively for fiscal years
beginning on or after December 15, 2008. The statement also applies to the treatment of taxes from prior business combinations. The statement
requires more assets acquired and liabilities assumed in future business combinations to be measured at fair value as of the acquisition date. In
addition, expenses incurred for all acquisition-related costs are to be expensed and liabilities related to contingent consideration are to be remeasured
to fair value each subsequent reporting period. We adopted the new authoritative guidance with respect to business combinations at
the beginning of our 2010 fiscal year, or October 1, 2009, and believe the impact will be material as it applies to the accounting treatment of
our merger with SolCool.
In December 2007, the FASB issued authoritative guidance on accounting for collaborative arrangements which is effective for us
beginning October 1, 2009 and will be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the
effective date. The authoritative guidance defines collaborative arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the arrangement and third parties. The adoption of this authoritative
guidance will not have a material impact on our financial position and results of operations.
Liquidity, Going Concern and Capital Resources
We have prepared our consolidated financial statements assuming that we will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of business. We had $20,000 in unrestricted cash on hand as of
September 30, 2009. We had an accumulated deficit as of September 30, 2009 in the amount of $48,274,000 and negative working capital of
$4,240,000. For the fiscal year ended September 30, 2009, we had negative cash flow from operating activities of amount of $1,019,000.
We have limited capital resources and have sustained substantial losses, which raise substantial doubt about our ability to continue as
a going concern. In addition, we now have multiple instances of actual and threatened litigation for past-due vendor balances and other
obligations. Some of these may result in additional loss, expense, and management burden. We must, therefore, raise sufficient capital to
remedy these claims, fund our overhead burden, and continue our R&D and product development efforts going forward. Without this funding,
our current cash balance is estimated to not support our operations through January 2010. Although we have entered into and are negotiating
agreements for the sales of equity securities to meet our requirements, no assurance can be given that we will be successful in obtaining
adequate capital on acceptable conditions or at all.
In February 2009, we entered into a Securities Purchase Agreement with Agile and Capitoline under which we issued Notes secured
by all of our assets. The Notes are convertible at $3.33 per share, subject to down-round adjustment based on future common stock sales. As of
September 30, 2009, we had received net proceeds of $732,000 from eight tranches in aggregate note amounts totaling $956,000. Subsequent
to September 30, 2009, we have received $125,000 in additional net proceeds in aggregate note amounts totaling $164,000.
In July 2009, we entered into a Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Optimus Capital Partners, LLC
(“Optimus”), under which Optimus, subject to certain conditions, committed to purchase up to $10,000,000 of our Series B preferred stock. As
of the date of this report, we have not issued any tranche notices for funding under the Purchase Agreement.
16
Discussion of Cash Flows
We used cash of approximately $1.0 million in our operating activities in 2009, compared to $2.4 million in 2008. Cash used in
operating activities relates primarily to funding net losses offset partially by non-cash expenses such as stock-based compensation. We expect
to use cash for operating activities in the foreseeable future as we continue our operating activities.
Our investing activities used cash of approximately $16,000 in 2009 compared to nil in 2008. The cash used was from notes
receivable issued to SolCool and were to be used for operating expenses as we continued our efforts toward completion of a merger agreement.
Our financing activities provided cash of approximately $996,000 in 2009 compared to $1.8 million in 2008. Changes in cash from
financing activities are primarily due to proceeds from sale of common stock and preferred stock, and net proceeds from notes payable, less
principal payments.
Recent Financing Activities
In July 2009, we entered into the Purchase Agreement with Optimus under which Optimus, subject to certain conditions, committed to
purchase up to $10 million of our Series B Preferred Stock. As of the date of this report, we have not issued any tranche notices for funding.
Summary
We are dependent on existing cash resources and external sources of financing to meet our working capital needs. The current cash
balance, which includes proceeds from our bridge funding, is estimated to support our budgeted and anticipated working capital requirements
through approximately January 2010. To satisfy our working capital requirements from that point forward, we are currently seeking financing
from the sale of debt or equity instruments to current investors and potential strategic investors. There is no assurance that we will be
successful in raising this capital on a timely basis, if at all. The failure to obtain the necessary working capital would have a material adverse
effect on the development program and business prospects and, depending upon the shortfall, we may have to curtail or cease our operations.
To attain profitable operations and generate cash flow, management’s plan is to execute its strategy of:
We will continue to be dependent on outside capital to fund our operations for the near future. We have relied primarily on sales of
securities and proceeds from borrowings for operating capital. During 2009, we raised capital by selling nine promissory notes for a total of
$1,056,000 with net proceeds of $832,000 received upon closing. During the year ended September 30, 2009, we also received payments of
$1,147,000 from the ONR pursuant to the terms of a grant providing expense reimbursement for continuing research and development having
to do with certain technology. As of September 2009, all of the work under this contract was completed and we had received all related
payments due. In addition, during the year ended September 30, 2009, we received $191,000 from a private placement of our Series A
preferred stock. Any future financing we obtain may further dilute or otherwise impair the ownership interest of our current stockholders. If we
fail to generate positive cash flows or obtain additional capital when required, we could modify, delay or abandon some or all of our plans.
These factors, among others, raise substantial doubt about our ability to continue as a going concern.
(i) completing production prototypes for EKO vehicles, Hobie Cat, and other customers, and qualifying the product for high
volume market acceptance,
(ii) funding the market growth of SolCool DC-air conditioning products, and enabling shipment to existing and future
customers, and
(iii) Developing and deploying RAPS systems, and other energy generation and storage solutions.
17
Comparison of Annual Results of Operations
Revenue. Revenue decreased in the year ended September 30, 2009 due to the winding up of activity under the September 2008 ONR
contract. As of September 2009, all of the work under this contract was completed and we have received all related payments.
Research and Development. Research and Development (“R&D”) expenses consist primarily of salaries and other personnel-related
expenses, consulting and other outside services, laboratory supplies facilities costs and other costs. We expense all R&D costs as
incurred. R&D expense for the year ended September 30, 2009 decreased as compared to the 2008 period, due to the following:
We expect our R&D expenses to increase in 2010 due to the anticipated increase in product development activities related to
technology improvements and specific customer products
General and Administrative. General and administrative expense (“G&A”) consist primarily of salaries and other personnel-related
expenses to support our R&D activities, non-cash stock-based compensation for general and administrative personnel and non-employee
members of our Board of Directors, professional fees, such as accounting and legal, corporate insurance and facilities costs. The 59% increase
in general and administrative expense in 2009 compared to 2008 resulted primarily from the increase in stock-based compensation in the
current year. Non-director Stock compensation expense increased to $2,685,000 in 2009 from $491,000 in 2008. The increase in stock
compensation expense was due to stock options issued to management and employees in September 2009. These stock options were issued to
encourage retention and compensate for furloughs and salary reductions in 2009 and the board of director’s compensation was recorded based
on the implementation of the compensation plan approved in February 2009 and effective as of June 2008 and the issuance of stock options to
directors in September 2009. We recorded to expense $485,000 and nil for director stock based compensation for the year’s ended September
30, 2009 and 2008, respectively. We recorded total board compensation of $635,000 in board of director’s in 2009 as compared to nil in 2008.
The increase in stock-based compensation in the current year was partially offset by the following:
For the years ended September 30, $ %
2009 2008 Change Change
Contract Revenues $ 1,106,976 $ 1,395,729 (288,753 ) -21 %
Operating expenses
Research and development expense 1,452,714 2,990,406 (1,537,692 ) -51 %
General and administrative expense 4,308,627 2,709,973 1,598,654 59 %
Total operating expenses 5,761,341 5,700,379 60,962 1 %
Loss from operations (4,654,365 ) (4,304,650 ) (349,715 ) -8 %
Other income (expense), net
Amortization of deferred financing costs (426,582 ) (575,000 ) 148,418 26 %
Interest expense, net (1,433,367 ) (1,481,073 ) 47,706 3 %
Gain on extinguishment of debt — 206,252 (206,252 ) -100 %
Net Loss $ (6,514,314 ) $ (6,154,471 ) (359,843 ) 6 %
· Personnel-related expenses decreased by approximately 50%, to $837,000 in 2009 compared to $1,668,000 in 2008 due to
streamlining of operations and reductions in head count.
· Project and laboratory expenses, including direct expenditures relating to the ONR contract, decreased by 51% to $280,000
in 2009 compared to $573,000 in 2008, due to reduced headcount and reduced ONR related expenditures.
· Stock-based compensation included in R&D expense decreased from $260,000 in 2008 to $74,000 in 2009.
· Facilities expenses decreased by 36% to $234,000 in 2009 compared to $365,000 in 2008, primarily due to a decrease in
leased office space and reduced IT and computer related expenditures allocated on a headcount related basis.
· Depreciation expense included in R&D expense was $28,000 in 2009 as compared to $125,000 in 2008, due to laboratory
assets reaching the end of their accounting useful lives.
18
We expect general and administrative expenses to increase in fiscal 2010 in support of our expected increased R&D and product
development activities.
Amortization of deferred financing costs. We incurred financing costs and fees related to our outstanding loans. The decrease in
amortization of deferred financing costs in 2009 compared to 2008 is due to the differing loan terms, fees and resulting amortization of our
loans with Agile and Capitoline in 2009 and loans with EPD Investment Co. LLC (“EPD”) and CAMHZN Master LDC (“CAMHZN “) in
2008.
Interest expense, net . We incurred interest expense on our outstanding loans. The 3% decrease in interest expense, net, in 2009 is
primarily due to the differing loan terms and resulting interest on our loans with Agile and Capitoline as compared with those of the loans with
EPD and CAMHZN for the same period in 2008. We expect interest expense to decrease in 2010 as a result of the lower loan balances and
interest resulting from payment of loan and accounts payable balances from funds received from anticipated long term funding efforts.
Gain on extinguishment of Debt. A gain on extinguishment of debt in the amount of $206,000 was recorded in the year ended September
30, 2008. There was no comparable extinguishment in the year ended September 30, 2009.
Off-Balance Sheet Arrangements
As of September 30, 2009, we did not have any off-balance sheet arrangements.
· G&A salaries decreased by 58% to $413,000 in 2009 from $985,000 in 2008 primarily due to the decreased headcount of
administrative staff.
· Professional services expenses decreased by approximately 54% to $442,000 in 2009 from $971,000 in 2008 primarily due to
reductions in technical consulting, legal and accounting services.
· Marketing and other administrative expenses decreased by $115,000 to $92,000 in 2009 from $207,000 in 2008 primarily due
to decreases in marketing, public relations, and employee travel and moving expenses.
19
Item 8: Financial Statements and Supplementary Data.
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 21
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets at September 30, 2009 and 2008 22
Consolidated Statements of Operations for the years ended September 30, 2009 and 2008 23
Consolidated Statements of Cash Flows for the years ended September 30, 2009 and 2008 24
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended September 30, 2009 and 2008 25
Notes to Consolidated Financial Statements 26
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Neah Power Systems, Inc.
Bothell, Washington
We have audited the accompanying consolidated balance sheets of Neah Power Systems, Inc. and Subsidiary ("the Company") as of
September 30, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years
then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neah
Power Systems, Inc., and Subsidiary as of September 30, 2009 and 2008, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company had an accumulated deficit of approximately $48,274,000 and
negative working capital of approximately $4,240,000 at September 30, 2009. Additionally, the Company had negative cash flows from
operating activities of approximately $1,019,000 for the year ended September 30, 2009, and has experienced recurring losses from
operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding this
matter are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
January 13, 2010
21
NEAH POWER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2009 and 2008
See Notes to Consolidated Financial Statements
September 30, September 30,
2009 2008
ASSETS
Current assets
Cash and cash equivalents $ 20,223 $ 59,661
Contract receivable 0 39,718
Deferred financing costs, net 28,594 —
Prepaid expenses and other current assets 63,956 43,847
Total current assets 112,773 143,226
Property and equipment, net 43,919 71,870
Total assets $ 156,692 $ 215,096
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 1,763,581 $ 1,669,068
Accrued expenses 521,439 218,138
Notes payable - related parties 102,416 45,000
Notes payable, net of debt discount of $8,745 and $0, respectively 1,776,299 589,201
Deferred revenue 189,500 189,500
Total current liabilities 4,353,235 2,710,907
Total liabilities 4,353,235 2,710,907
Commitments and contingencies
Stockholders' equity (deficit)
Series A preferred stock and additional-paid-in capital, convertible $0.001 par value, $0.04 stated value,
4,996,500 and 25,000,000 shares authorized, respectively, 0 and 20,217,100 shares issued and
outstanding, respectively 0 669,007
Common stock and additional paid-in-capital $0.001 par value, 80,000,000 shares authorized, 34,833,598
and 8,646,318 shares issued and 34,377,890 and 6,617,478 outstanding, respectively 44,077,472 38,594,883
Treasury stock, 112,590 common shares, at no cost
Accumulated deficit (48,274,015 ) (41,759,701 )
Total stockholders' equity (deficit) (4,196,543 ) (2,495,811 )
Total liabilities and stockholders' equity (deficit) $ 156,692 $ 215,096
22
NEAH POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2009 and 2008
See Notes to Consolidated Financial Statements
For the For the
Year Ended Year Ended
September 30, 2009 September 30, 2008
Contract Revenues $ 1,106,976 $ 1,395,729
Operating expenses
Research and development expense 1,452,714 2,990,406
General and administrative expense 4,308,627 2,709,973
Total operating expenses 5,761,341 5,700,379
Loss from operations (4,654,365 ) (4,304,650 )
Other income (expense), net
Amortization of deferred financing costs (426,582 ) (575,000 )
Interest expense, net (1,433,367 ) (1,481,073 )
Gain on extinguishment of debt — 206,252
Net Loss $ (6,514,314 ) $ (6,154,471 )
Basic and diluted loss per common share $ (0.45 ) $ (1.39 )
Basic and diluted weighted average common shares outstanding 14,569,968 4,425,335
23
NEAH POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2009 and 2008
For the Years ended September 30,
2009 2008
Cash flows from operating activities:
Net loss $ (6,514,314 ) $ (6,154,471 )
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 27,688 125,220
Amortization of deferred financing costs 426,582 575,000
Share-based payments included in operating expenses 3,332,707 804,011
Non-cash forbearance fees on note payable 567,000 -
Amortization of debt discount and beneficial conversion feature on convertible debt 122,098 216,299
Gain on extinguishment of debt - (206,252 )
Interest paid with common stock or warrants 563,727 1,097,657
Loss on disposal of assets 263 -
Other 1,861 -
Changes in operating assets and liabilities
Contract receivable 39,718 13,594
Prepaid expenses and other current assets (4,108 ) (4,335 )
Accounts payable 114,513 939,728
Accrued expenses 303,300 192,101
Net cash used by operating activities (1,018,965 ) (2,401,448 )
Cash flows from investing activities:
Issuance of notes receivable (16,000 ) -
Net cash used by investing activities (16,000 ) -
Cash flows from financing activities:
Proceeds from sale of common stock - 100,000
Net proceeds from notes payable 832,091 1,095,000
Proceeds from warrant exercises - 126,181
Proceeds from sale of Series A convertible preferred stock 191,020 707,586
Principal payments on notes payable (27,584 ) (280,000 )
Other - 1,900
Net cash provided by financing activities 995,527 1,750,667
Net change in cash and cash equivalents (39,438 ) (650,780 )
Cash and cash equivalents, beginning of period 59,661 710,441
Cash and cash equivalents, end of period $ 20,223 $ 59,661
Supplemental cash flow information
Cash paid for interest $ - $ 331
Cash paid for income taxes $ - $ -
Noncash investing and financing activities
Increase in note payable due to forbearance fee $ 567,000 $ -
Shares issued in partial payment of forebearance fee on note payable $ 327,000 $ -
Deferred financing costs paid with issuance of common stock $ 364,128 $ 575,000
Settlement of accounts payable with issuance of stock $ 20,000 $ 105,000
Settlement of note payable with issuance of stock $ 15,000 $ -
Original issue discount on notes payable $ 130,843 $ -
Partial conversion of EPD Note Payable to common stock $ - $ 62,576
Accounts payable financed with Note Payable $ - $ 89,201
Conversion of note payable to Series A Preferred Stock $ - $ 50,000
See Notes to Consolidated Financial Statements
Issuance of common stock to Series A placement agent $ - $ 63,338
Debt discount from issuance of warrants $ - $ 135,667
24
NEAH POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT )
For the Years Ended September 30, 2009 and 2008
See Notes to Consolidated Financial Statements
Preferred Stock Common Stock and APIC Treasury Stock Total
Number Number of shares Number Accumulated Stockholders'
of Shares Amount Outstanding Amount of Shares Amount Deficit Equity (Deficit)
Balances at September 30, 2007 - $ - 3,485,391 $ 35,442,920 (112,590 ) $ - $ (35,605,230 ) $ (162,310 )
Sale of Series A Preferred Stock for cash 18,967,100 619,007 619,007
Conversion of debt to Series A Preferred Stock 1,250,000 50,000 50,000
Issuance of common stock to Series A placement agent 263,910 63,338 63,338
Sale of common stock for cash 300,000 100,000 100,000
Issuance of common stock pursuant to antidilution
provisions of common stock purchase agreement 1,700,000 - -
Issuance of common stock with respect to debt financing
fees 85,008 575,000 575,000
Issuance of common stock for note payable penalty
consideration recorded as interest expense 705,277 1,091,724 1,091,724
Common stock issued upon exercise of warrants 18,927 126,181 126,181
Common stock issued upon partial conversion of note
payable 23,466 62,576 62,576
Common stock issued for legal settlement 10,500 105,000 105,000
Issuance of restricted common stock to employees 25,000 33,332 33,332
Share based compensation on options and warrants 770,679 770,679
Issuance of warrants in lieu of interest on note payable 5,933 5,933
Allocation of proceeds from debt to warrants and
beneficial conversion feature 216,299 216,299
Other 1,901 1,901
Net loss for the year ended September 30, 2008 (6,154,471 ) (6,154,471 )
Balances at September 30, 2008 20,217,100 669,007 6,617,478 38,594,883 (112,590 ) - (41,759,701 ) (2,495,811 )
Sale of Series A preferred stock 4,775,500 191,020 191,020
Conversion of Series A preferred stock to common stock (24,992,600 ) (860,027 ) 19,994,394 860,027 -
Shares issued in partial payment of forebearance fee on
note payable 1,635,000 327,000 327,000
Shares issued in connection with settlement of accounts
payable 199,998 20,000 20,000
Common stock and warrants issued for services 405,500 127,252 127,252
Share-based compensation related to stock options 3,205,455 3,205,455
Shares issued for financing costs related to notes payable 1,620,470 364,128 364,128
Shares issued in payment of interest on notes payable 1,955,050 563,727 563,727
Issuance of common stock pursuant to antidilution
provisions of common stock purchase agreement and
settlement of note payable 1,950,000 15,000 15,000
Net loss for the year ended September 30, 2009 (6,514,314 ) (6,514,314 )
Balances at September 30, 2009 - $ 0 34,377,890 $ 44,077,472 (112,590 ) $ - $ (48,274,015 ) $ (4,196,543 )
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
We are engaged in the development and sale of renewable energy solutions. Our fuel cells are designed to replace existing
rechargeable battery technology in mobile electronic devices and small-scale transportation vehicles. Our long-lasting, efficient and safe power
solutions for these devices, such as notebook PCs, military radios, and other power-hungry computer, entertainment and communications
products, use our patented, silicon-based design with higher power densities to enable lighter-weight, smaller form-factors and potentially
lower costs. Through our recent agreement to acquire SolCool One, LLC (“SolCool”), we also intend to expand our portfolio of renewable
energy solutions that we intend to offer the market. SolCool is a leading supplier of direct current (“DC”) solar air-conditioning systems for
off-the-grid applications. We intend to utilize SolCool’s worldwide distribution network and developed market to facilitate the adoption of fuel
cells and Remote Area Power Supplies (“RAPS”), or integrated power solutions for similar applications of our fuel cell products.
On July 27, 2009 and amended September 19, 2009, we entered into a first amended and restated agreement and plan of merger (the
“Amended Merger Agreement”) with SolCool, Neah Power Acquisition Corp. (“Merger Sub”), our wholly-owned subsidiary, and Mark Walsh,
manager and founder of SolCool, pursuant to which the Merger Sub will be merged into SolCool (the “Merger”).
Under the terms of the Amended Merger Agreement, we will issue $500,000 of common stock, or 476,000 shares of common stock, at
a price of $1.05 per share, such shares of common stock to vest as follows: (i) 50% upon execution and the remaining 50% 24 months from the
date of the Amended Merger Agreement, such vesting contingent upon Mark Walsh remaining our employee and using his best efforts to
achieve SolCool’s business plan, and (ii) pay $100,000 to fund SolCool’s operations and shipments. In August 2009, we paid $10,000 towards
the cash payment obligation. In October 2009, we issued the initial payment of 238,000 shares. 238,000 additional common shares were issued
in October 2009 and will be held in escrow to ensure best-effort execution of SolCool’s obligations under the Amended Merger Agreement.
The closing of the merger is subject to other customary closing conditions including the filing of the articles of merger with the applicable
states and was not completed for accounting purposes prior to September 30, 2009 and thus the merger is not reflected in these consolidated
financial statements.
Note 2. Going Concern
We have prepared our consolidated financial statements assuming that we will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of business. We had $20,000 in unrestricted cash on hand as of
September 30, 2009. We had an accumulated deficit as of September 30, 2009 of $48,274,000 and negative working capital of $4,240,000. For
the fiscal year ended September 30, 2009, we had negative cash flow from operating activities of $1,019,000.
We have limited capital resources and have sustained substantial losses, which raise substantial doubt about our ability to continue as
a going concern. In addition, we now have multiple instances of actual and threatened litigation complaints for claims of past-due vendor
balances and other obligations. Some of these may result in additional loss, expense, and management burden. We must, therefore, raise
sufficient capital to remedy these claims, fund our overhead burden, and continue our R&D and product development efforts going forward.
Without this funding, our current cash balance is estimated to not support our operations through January 2010. Although we have entered into
and are negotiating agreements for the sales of equity securities to meet our requirements, no assurance can be given that we will be successful
in obtaining adequate capital on acceptable conditions or at all.
We have relied primarily on sales of securities and proceeds from borrowings for operating capital. During the fiscal year ended
September 30, 2009, we raised capital by selling nine promissory notes for a total of $1,056,000 with net proceeds of $832,000 received upon
closing.
During the year ended September 30, 2009, we also received payments of $1,147,000 from the Office of Naval Research (“ONR”)
pursuant to the terms of a grant providing expense reimbursement for continuing research and development having to do with certain
technology. As of September 2009, all of the work under this contract was completed and we had received all related payments due.
26
Additionally, we have received approximately $191,000 in our fiscal year 2009 of proceeds from a private placement (see Note 7).
In July 2009, we entered into a Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Optimus Capital Partners, LLC
(“Optimus”), under which Optimus, subject to certain conditions, has committed to purchase up to $10 million of our Series B Preferred Stock
(see Note 7). As of the date of this report, we have not issued any tranche notices for funding
In February 2009, we entered into a Securities Purchase Agreement with Agile Opportunity Fund, LLC (“Agile”) and Capitoline
Advisors Inc. (“Capitoline”) under which we issued Original Issue Discount Term Convertible Notes (the “Notes”) secured by all of our assets.
The Notes are convertible into shares of our common stock at $3.33 per share. As of September 30, 2009, we had received proceeds net of
Original Issue Discount (“OID”), prepaid interest, and financing costs paid in cash of $676,000 from eight tranches in aggregate note amounts
totaling $732,000. Subsequent to September 30, 2009, we have received $125,000 in additional net proceeds in aggregate note amounts totaling
$164,000.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset
amounts and classification of liabilities that might be necessary should we have to curtail operations or be unable to continue in existence.
Note 3. Summary of Significant Accounting Policies
Principles of Consolidation
Neah Power Systems, Inc. was incorporated in Nevada on February 1, 2001, under the name Growth Mergers, Inc. (“GMI”). In March
2006, GMI, at the time a public shell company, acquired all of the outstanding capital stock of an operating Washington corporation, Neah
Power Systems, Inc. (“NPSWA”). Neah Power Systems, Inc. of Nevada (“NPSNV”) is the legal parent of NPSWA, but these financial
statements, other than capital stock accounts, are those of NPSWA. The consolidated financial statements include the accounts of NPSNV and
its wholly-owned subsidiary, NPSWA. Intercompany balances and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation. There has been no impact on
previously reported net loss or stockholders’ equity (deficit).
Use of Estimates
In preparing financial statements conforming with accounting principles generally accepted in the United States, management is
required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments that are readily convertible to cash and have original maturities
of three months or less at the time of acquisition. On occasion, we maintain cash balances in excess of federal insurance limits. We have not
experienced any losses related to these balances, and believe our credit risk is minimal.
27
Fair Value of Financial Instruments
We consider the fair value of cash and cash equivalents, contract receivable, accounts payable, notes payable and accrued expenses to
not be materially different from their carrying value due to their short-term maturities. Effective October 1, 2008, we adopted the authoritative
guidance for financial assets and liabilities which defines fair value, provides guidance for measuring fair value and requires certain
disclosures. At September 30, 2009, we had no financial assets or liabilities subject to fair value measurement.
Depreciation and Amortization
Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the related assets, ranging from
three to five years for property and equipment. Leasehold improvements are amortized over the shorter of their useful lives or term of the lease.
Impairment of Long-Lived Assets
Our long-lived assets, including property and equipment, are reviewed for carrying value impairment at least annually or more
frequently when events or changes in circumstances indicate that the carrying amount may not be recoverable.
Revenue Recognition
Revenue normally consists of grant and contract revenues. We recognize revenue when we have persuasive evidence of an
arrangement, the services have been provided to the customer, the price for services is fixed and determinable, no significant unfulfilled
obligations exist and collectability is reasonably assured.
Grant revenues are recognized as the related research is conducted. Contract revenues consist of amounts recorded from services
provided to a single customer. Revenues earned under such arrangements have been recorded as the services have been provided. Upfront
payments received under contractual arrangements are deferred and recognized as revenue over the service period.
Unearned revenues, recorded as deferred revenue in the consolidated balance sheets, were $189,500 as of September 30, 2009 and
2008 (See Note 8).
Research and Development Expense
Research and development costs are expensed as incurred.
Income Taxes
We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of assets and liabilities and on the expected future tax benefits to be derived
from net operating loss carryforwards measured using current tax rates. A valuation allowance is established if it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Share-Based Compensation
We use the Black-Scholes option pricing model as our method of valuation for share-based awards. Share-based compensation
expense is recorded over the requisite service period typically and based on the value of the portion of the share-based award that will be
earned and vested during the period, adjusted for expected forfeitures. The estimation of share-based awards that will ultimately vest requires
judgment, and to the extent actual or updated results differ from our current estimates, such amounts will be recorded in the period the
estimates are revised. Although the fair value of stock-based awards is determined in accordance with authoritative accounting literature, the
Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide
differing results. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our
stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited
to, the expected life of the award and expected stock price volatility over the term of the award.
28
Loss per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of
common stock shares outstanding during the period. Diluted loss per share, which would include the effect of the conversion of unexercised
stock options, unexercised warrants to common stock, preferred stock, and convertible debt is not separately computed because inclusion of
such conversions is antidilutive due to our net losses. Accordingly, basic and diluted loss per share is the same.
Basic weighted average common shares outstanding, and the potentially dilutive securities excluded from loss per share computations
because they are antidilutive, are as follows for the years ended September 30, 2009 and 2008:
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on revenue arrangements with
multiple deliverables that are outside the scope of the software revenue recognition guidance (which does not have impact on our
accounting). Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement
cannot be determined, a best estimate of a selling price is required to separate deliverables and allocate arrangement consideration using the
relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition. We believe adoption of this new guidance will not have a material effect on our
consolidated financial statements.
In June 2008, the Emerging Issues Task Force of the FASB issued authoritative guidance on accounting for convertible instruments
and warrants with provisions that protect holders from declines in the stock price (“down-round” provisions), which is effective for us
beginning October 1, 2009. Instruments with such provisions will no longer be recorded in equity. The guidance is to be applied to outstanding
instruments as of the beginning of the fiscal year in which the guidance is applied. The cumulative effect of the change in accounting principle
shall be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal
year, presented separately. The cumulative-effect adjustment is the difference between the amounts recognized in the statement of financial
position before initial application of authoritative guidance and the amounts recognized in the statement of financial position upon its initial
application. The amounts recognized in the statement of financial position as a result of the initial application are determined based on the
amounts that would have been recognized if the guidance had been applied from the issuance date of the instrument. In connection with the
convertible notes issued to Agile and Capitoline, which have such down-round provisions, we are assessing the impact of adoption of this
guidance on our consolidated financial position and results of operations.
In December 2007, the FASB issued authoritative guidance on business combinations to be applied prospectively for fiscal years
beginning on or after December 15, 2008. The statement also applies to the treatment of taxes from prior business combinations. The statement
requires more assets acquired and liabilities assumed in future business combinations to be measured at fair value as of the acquisition date. In
addition, expenses incurred for all acquisition-related costs are to be expensed and liabilities related to contingent consideration are to be remeasured
to fair value each subsequent reporting period. We adopted the new authoritative guidance with respect to business combinations at
the beginning of our 2010 fiscal year, or October 1, 2009, and believe the impact will be material as it applies to the accounting treatment of
our merger with SolCool.
2009 2008
Basic and diluted weighted average common stock shares outstanding 14,569,968 4,425,335
Potentially dilutive securities excluded from loss per share computations:
Convertible Series A preferred stock 0 16,175,702
Convertible debt 292,039 5,000
Common stock options 2,862,745 232,595
Common stock purchase warrants 636,832 463,873
29
In December 2007, the FASB issued authoritative guidance on accounting for collaborative arrangements which is effective for us
beginning October 1, 2009 and will be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the
effective date. The authoritative guidance defines collaborative arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the arrangement and third parties. The adoption of this authoritative
guidance will not have a material impact on our consolidated financial position and results of operations.
Note 4. Property and Equipment
Note 5. Accrued Expenses
Note 6. Notes Payable
Agile Opportunity Fund, LLC and Capitoline Advisors, Inc. - In February 2009, we entered into a Securities Purchase Agreement with
each of Agile and Capitoline under which we were to receive funding through the issuance of Notes in the aggregate amount of $1,050,000 and
an aggregate purchase price of $900,000, with a maturity date of August 12, 2009 and prepaid interest at the rate of 18% per annum. The
interest rate increases to 36% upon the event of default. The Notes are convertible into shares of our common stock at a conversion price of
$3.33 per share, at the discretion of the creditor, subject to down-round adjustment to conversion price based on future common stock sales.
The Notes are subject to mandatory redemption in the event we enter into a going-private transaction or we are sold. All shares issued under
terms of the Securities Purchase Agreement have been calculated using market value of stock on the date of issuance. The Notes are secured by
all our assets and, upon conversion, have certain piggyback registration rights. In October 2009 we entered into a 4 th Amendment to Securities
Purchase Agreement with Agile and Capitoline whereby we issued 10,000,000 shares of our common stock to be held as additional collateral
for the Notes issued to these lenders.
September 30, September 30,
2009 2008
Laboratory equipment $ 1,343,969 $ 1,348,620
Leasehold improvements 579,641 579,641
Computer equipment and software 109,632 140,602
Office furniture and equipment 56,000 56,000
Subtotal 2,089,242 2,124,863
Accumulated depreciation and amortization (2,045,323 ) (2,052,993 )
Property and equipment, net $ 43,919 $ 71,870
September 30, September 30,
2009 2008
Vacation pay $ 44,341 $ 57,068
Accrued interest 139,098 47,049
Accrued board compensation 149,788 —
Payroll and related taxes 117,860 114,021
Accrued taxes 70,352 —
Total $ 521,439 $ 218,138
30
In February, March and June 2009, we received funds from Agile pursuant to these agreements in the aggregate face amount of
$635,000 and an OID of $85,000 for an aggregate purchase price amount of $550,000. The OID was recorded as debt discount and has been
amortized in its entirety as interest expense as of September 30, 2009. In consideration for the Notes from Agile, approximately 1,568,000
common shares, valued at $242,000, are issuable under the terms of the agreement. This was recorded as deferred financing costs and was
amortized through the maturity dates of the Notes. Under the terms of the agreement, approximately 1,804,000 additional shares valued at
$302,000 are also issuable and have been recorded as interest expense. As of the date of this report, the principal balances of the Notes remain
unpaid and are past-due. We are negotiating with Agile on forbearance. However, there is no assurance that Agile will grant forbearance or
refrain from taking actions against us available to them under the agreement.
In July, August and September 2009, we received funds from Capitoline in the aggregate face amount of $321,000 and an OID of
$46,000 for an aggregate purchase price amount of $275,000. The OID was recorded as debt discount with $37,000 amortized as interest
expense as of September 30, 2009. The Notes issued to Capitoline in July 2009 have a maturity date of August 12, 2009, the note issued in
August 2009 has a maturity date of October 23, 2009, and the note issued in September has a maturity date of November 28, 2009. In
consideration for the Notes to Capitoline, 52,064 common shares, valued at $122,000 are issuable under the terms of the agreement. This has
been recorded as deferred financing costs and is being amortized over the term of the Notes. Under the terms of the agreement, 65,100
additional shares valued at $153,000 are also issuable and have been recorded as interest expense. As of September 30, 2009, the principal
balances of the Notes remain unpaid with principal balances of $204,000 past the maturity dates. As of the date of this report, all Notes remain
unpaid and are past-due. We are negotiating with Capitoline on forbearance. However, there is no assurance that Capitoline will grant
forbearance or refrain from taking actions against us available to them under the agreement.
CAMHZN Master LDC - In November 2007, we sold a $500,000 12% convertible secured promissory note, amended in May 2008, to
mature on September 29, 2008, to CAMHZN Master LDC (“CAMHZN”) for net proceeds of $465,000. The loan agreement provides for
conversion of the principal balance into shares of our common stock at a conversion price of $100.00 per share, at the discretion of the creditor.
The loan agreement also provides the interest rate will increase to 110% in the event of default. In January 2009, we entered into an amended
loan agreement with CAMHZN, whereby, effective December 31, 2008, CAMHZN agreed to forbear from exercising any remedies available
under its loan documents or applicable law through March 2009. In exchange for the forbearance, we agreed to pay a fee of $567,000 which
was added to the principal balance of the loan and payable in cash or stock at our discretion. In February 2009, we released to CAMHZN, in
partial payment of the fee, 1,635,000 shares valued at $327,000, based on the market value of our shares on the date issued. These shares were
formerly held by CAMHZN as collateral shares under the amended note agreement. As of the date of this report, the principal balance of the
note totaling $740,000 remains unpaid and is past-due. Also, as of the February 2009 release of the 1,635,000 collateral shares, there have been
no additional shares issued as collateral. We are negotiating with CAMHZN on further forbearance. However, there is no assurance that
CAMHZN will grant further forbearance or refrain from taking actions against us available under the agreement.
Aspen Technologies - In July 2008, we entered into an agreement with Aspen Technologies (“Aspen”), our vendor, whereby the
accounts payable balances owed to Aspen would be converted to a note payable up to a maximum of $100,000. Under the terms of the note
payable, we would pay Aspen eight equal payments of $12,500 per month beginning in August 2008 until the outstanding principal balance
was paid. In payment of interest on the note, we issued five year warrants to purchase 9,000 shares of our common stock at $1.00 per share
(See Note 7). As of September 30, 2009 and 2008, the principal balance was $89,000. As of the date of this report, no payments have been
made. We have no assurance that Aspen will refrain from taking actions against us under the terms of the note.
EPD Investment Co., LLC – On November 9, 2007, we sold a 10% convertible secured promissory note due January 1, 2009 to EPD
Investment Co., LLC (“EPD”) for net proceeds of $500,000. Effective February 2008, we amended our November 2007 loan agreements with
EPD to eliminate the requirement that we issue additional collateral shares of five times the note balance, extended the security interest until
the note was paid in full, decreased the rate for conversion of the note to shares of common stock to $2.67 and required EPD to convert the note
prior to its public sale of Equity Shares as defined in the agreements. In addition, EPD converted $63,000 of the debt into approximately 23,000
shares of our common stock.
31
In 2007, we issued approximately 51,000 shares of common stock to EPD which represented financing fees determined to be
$350,000 based on the market value of the stock. These financing fees were capitalized, recorded during the three months ended December 31,
2007, and were fully amortized as of September 30, 2008. There was a beneficial conversion feature associated with the EPD note
which was valued at $81,000 and expensed as interest expense on the issuance date of the note as it was immediately convertible at that date. In
addition, a 5-year warrant to purchase 15,000 additional shares of our common stock at $9.67 per share were recorded based on the relative fair
value as compared to the fair value of the debt at issuance. The relative fair value was estimated at $98,000, recorded as additional paid-in
capital, and as a discount to notes payable and was completely amortized to interest expense as of September 30, 2008 using the effective
interest method.
During the year ended September 30, 2008, we became obligated for certain penalties pursuant to defaults, as defined under the loan
agreements with EPD, in the amount of $513,000. These penalties were paid with approximately 300,000 shares of our common stock to EPD,
at various calculated prices per share based on the market value of our common stock. The aggregate penalty was recorded as interest expense
during the year ended September 30, 2008.
Effective as of September 2008, we consummated the transactions under an Agreement and Release, dated August 2008, with NPS
Investment Co., LLC (“NPS”), as assignor of, and successor-in-interest to EPD, pursuant to which we paid NPS the cash amount of $200,000
in consideration for the full satisfaction and cancellation of the outstanding convertible secured promissory note and related obligations having
an outstanding principal balance of $357,000 and accrued interest and penalties of $49,000 held by NPS. In connection with the agreement,
NPS released and terminated its liens on our assets and the pledged securities that secured the payment of the note. We recorded a gain on
extinguishment of debt of $206,000 resulting from this transaction.
Related Party Notes
In September 2008, we entered into a note agreement with Summit Trading Limited (“Summit”). Under the agreement, we borrowed
$15,000 at no interest with a maturity date of October 2, 2008. The balance was paid in full in August 2009. The principal balance is included
in notes payable, related parties on our consolidated balance sheet at September 30, 2008.
In September 2009, we received funds from Daisy Rodriguez, a private investor married to the primary beneficiary of Summit, in the
aggregate face amount of $100,000 at 6% interest and an April 30, 2010 maturity date. The principal balance is included in notes payable,
related parties on our consolidated balance sheet at September 30, 2009.
In August 2008, we entered into a note agreement with our President and Chief Executive Officer, Dr. Gerard C. D’Couto. Under the
agreement, as amended, we borrowed $30,000 with interest at 10% compounded monthly and a maturity date of March 29, 2009. As of
September 30, 2009 and 2008 the remaining note balance was $2,416 and $30,000, respectively. The principal balance is included in notes
payable, related parties on our consolidated balance sheets.
Note 7. Stockholders’ Equity
Preferred Stock – Our board of directors has the authority, without action by the stockholders, to designate and issue up to 5,000,000
shares of preferred stock as of September 30, 2009 in one or more series and to designate the rights, preferences and privileges of each series,
any or all of which may be greater than the rights of our common stock.
In June 2008, our board of directors approved the issuance of a minimum of 7,500,000 shares of Series A preferred stock (“Series A”)
at a purchase price of $0.04 per share, or a minimum of $300,000 in the aggregate, to investors under a Series A Securities Purchase
Agreement. The holders of Series A were entitled to payment of dividends, when, as and if declared by our Board of Directors, in preference
to the holders of common stock. Holders of Series A are also entitled to a liquidation preference of $0.04 per share in the event of our
liquidation, dissolution or winding up. At the discretion of our board of directors, each share of Series A may be converted into .80 shares of
common stock. Except as required by law, the Series A has no voting rights. As of September 30, 2008, approximately $759,000 in gross
proceeds had been received from the offering. Further, a $50,000 note payable balance was converted into 1,250,000 shares of Series A during
the year ended September 30, 2008. Based on these transactions, 20,217,100 shares were issued under this agreement as of September 30, 2008
for net cash proceeds of approximately $708,000. During the year ended September 30, 2009, we issued an additional 4,775,500 shares of
Series A Preferred and received approximately $191,000 in cash proceeds, net of financing costs.
32
Jesup & Lamont Securities Corporation is acting as placement agent in connection with the private placement of the Series A and in
2008 received 264,000 shares of our common stock valued at approximately $63,000 in payment of services.
As of September 30, 2009, all 24,992,600 outstanding shares of our Series A were converted into 19,994,394 shares of our common
stock.
Series B Preferred Stock – As discussed in Note 2, in July 2009, we entered into the Purchase Agreement with Optimus under which
Optimus has committed to purchase up to $10,000,000 of our Series B preferred stock. Under the terms of the Purchase Agreement, from time
to time until July 29, 2010 and at our sole discretion, we may present Optimus with a notice to purchase such Series B Preferred Stock (the
“Notice”). Optimus is obligated to purchase such Series B Preferred Stock on the tenth trading day after the Notice date, subject to satisfaction
of certain closing conditions. Optimus will not be obligated to purchase the Series B Preferred Stock (i) in the event the closing price of our
common stock during the nine trading days following delivery of a Notice falls below 75% of the closing price on the trading day prior to the
date such Notice is delivered to Optimus, or (ii) to the extent such purchase would result in Optimus and its affiliates beneficially owning more
than 9.99% of our common stock.
On the date of delivery of each Notice under the Purchase Agreement, we will also issue to Optimus five-year warrants to purchase
our common stock at an exercise price equal to the closing price of our common stock on the trading day prior to the delivery date of the
Notice. The number of shares issuable upon exercise of the warrant will be equal in value to 135% of the purchase price of the Series B
preferred stock to be issued in respect of the related Notice. Each warrant will be exercisable on the earlier of (i) the date on which a
registration statement registering for resale the shares of common stock issuable upon exercise of such warrant becomes effective and (ii) the
date that is six months after the issuance date of such warrant.
The Series B preferred stock is redeemable after the fourth anniversary of the date of its issuance and is subject to repurchase: (i) at
any time at our election, or (ii) following the consummation of certain fundamental transactions, at the option of a majority of the holders of the
Series B preferred stock.
Holders of Series B preferred stock will be entitled to receive dividends which will accrue in shares of Series B preferred stock on an
annual basis at a rate equal to 10% per annum from the issuance date. Accrued dividends will be payable upon redemption of the Series B
preferred stock. The Series B preferred stock ranks, with respect to dividend rights and rights upon liquidation, senior to our common stock.
The Series B preferred stock and warrants and the common stock issuable upon exercise of the warrants will not be or have not been
registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
The terms of the Purchase Agreement and form of Warrant, described above, are only a summary of these documents and are qualified
in their entirety by reference to these documents, which are incorporated by reference to our Form 8-K filed on July 30, 2009. As of the date of
this report, we have not issued any tranche notices for funding under the Purchase Agreement.
Common Stock – Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote
of the holders of our common stock. Subject to the rights of the holders of any class of our capital stock having any preference or priority over
our common stock, the holders of shares of our common stock are entitled to receive dividends that are declared by our board of directors out
of legally available funds. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share
ratably in our net assets remaining after payment of liabilities, subject to prior rights of preferred stock, if any, then outstanding. Our common
stock has no preemptive rights, conversion rights, redemption rights, or sinking fund provisions, and there are no dividends in arrears or in
default. All shares of our common stock have equal distribution, liquidation and voting rights and have no preferences or exchange rights.
33
Common Stock Splits – In July 2009, we effectuated the 200:1 reverse common stock split approved by shareholders in August 2008.
In August 2009, FINRA approved our request for a 6:1 forward stock split of our common shares as approved by our board of directors. The
record date for this split was August 14, 2009. All common share and per share amounts included in these consolidated financial statements
have been adjusted retroactively to reflect the effects of these splits.
Upon the implementation of the 200:1 reverse common stock split, the authorized shares of common stock were reduced to 20 million
shares from 500 million. In July 2009, our board of directors approved the increase in authorized common stock from 20,000,000 shares to
80,000,000 shares.
Common Stock Issuances – During the year ended September 30, 2009, we issued approximately 396,000 shares of our common stock
for services valued at approximately $69,000 based on the market value of the stock. During the year, we also issued approximately 200,000
shares of our common stock, valued at $20,000, in connection with the settlement of outstanding accounts payable balances.
Pursuant to the terms of our convertible note payable agreement with CAMZHN (see Note 6), in February 2009 we issued 1,635,000
shares of our common stock valued at $327,000 based on the market value of the stock as a partial forbearance fee related to our note
payable. In addition, pursuant to the terms of our convertible note payable agreements with Agile and Capitoline (see Note 6), during the year
ended September 30, 2009, we issued 1,620,470 shares of our common stock valued at approximately $364,100, based on the market value of
the stock, for financing fees and 1,869,334 shares of our common stock valued at $455,200, based on the market value of the stock, for interest.
In April 2008, Summit, one of our largest shareholders, purchased 300,000 shares of common stock for $0.33 per share for a total of
$100,000. The purchase agreement provided standard piggyback registration rights and certain down-round protection, in that additional shares
would be issued to Summit in the event of subsequent financings at an effective price per share less than $0.33, subject to certain exceptions.
In September 2008 and August 2009, we issued 1,700,000 and 1,950,000 additional shares of common stock to Summit pursuant to
the terms of the anti-dilution clause of the agreement and, for the August 2009 stock issuance, in full payment of a $15,000 note due Summit.
Effective August 2009, the anti-dilution clause of the purchase agreement was terminated.
During the year ended September 30, 2008, CAMHZN received approximately 165,000 shares of common stock, valued at $275,000,
in payment of interest and penalties as provided for in the loan documents discussed in Note 6. All common shares issued were recorded to
interest expense during the year ended September 30, 2008. We also issued 33,750 shares of common stock in November 2007 to CAMHZN
for financing fees of $225,000 based on the market value of the stock. Additionally, pursuant to the loan agreement with CAMHZN, the
Company received correspondence from CAMHZN on May 13, 2008 demanding an additional 1,635,000 shares of common stock to raise their
number of collateral shares in order to comply with the 500% debt coverage requirement included in the loan agreement. Effective May 22,
2008, CAMHZN agreed to forbear from exercising any remedies available under its loan documents or applicable law for a period ending on
September 29, 2008, in exchange for the release of 240,000 shares of common stock which were valued at $304,000 and were recorded as
interest expense in the year ended September 30, 2008.
As discussed in Note 6, in November 2007 we issued approximately 51,000 shares of common stock to EPD for financing fees of
$350,000 based on the market value of the stock. In addition, during 2008, we issued approximately 300,000 shares of our common stock to
EPD, at various calculated prices per share based on the market value of our common stock, in payment of certain penalties pursuant to
defaults, as defined under the loan agreements with EPD. The aggregate penalty of $513,000 was recorded as interest expense during the year
ended September 30, 2008. In February 2008, EPD converted $63,000 of our outstanding note payable into 23,466 shares of our common
stock.
34
Long Term Incentive Compensation Plan – In August of 2008, we amended our Long Term Incentive Compensation Plan (“the Plan”)
first adopted in March 2006. Under the amended Plan, the maximum number of shares issuable is 6,000,000. The Plan is to continue for a term
of ten years from the date of its adoption. The Plan is administered by our board of directors. We have outstanding stock options for 2,862,745
shares to employees, the board of directors, and advisors and consultants, and none of these options have as of yet been exercised. Options are
exercisable for ten years from date of grant. Options granted in excess of 6,000,000 will require shareholder approval. For the years ended
September 30, 2009 and 2008, there were 2,841,700 and nil stock options issued, respectively, under the amended Plan.
Share-Based Compensation - To calculate the value of share-based compensation, we use the Black-Scholes fair value option-pricing
model with the following weighted average assumptions for options and warrants granted during the year ended September 30, 2009 and 2008:
Share-based payments recognized as operating expense are as follows for the year ended September 30, 2009 and 2008:
We awarded grants of restricted common stock to employees, net of cancellations, totaling 9,000 and 25,000 shares and valued at
approximately $25,200 and $33,300 for the years ended September 30, 2009 and September 30, 2008, respectively. All shares were fully
vested and recognized as expense within their respective years.
In September 2009, we cancelled approximately 75,000 stock options previously issued to employees having a weighted average
exercise price of $8.99 and, in September 2009 we issued these employees an aggregate of 2,376,250 new options having an exercise price of
$1.28 per share, which was equal to the fair value of our common stock on the date of grant. As a result of these transactions which is being
accounted for as a modification, we recognized an incremental credit of $96,000 to stock-based compensation in 2009, of which $9,000 was
recorded to R&D expense and $87,000 was recorded to G&A expense.
Warrants – At September 30, 2009, there were warrants outstanding for the purchase of approximately 637,000 shares of our common
stock at a weighted average exercise price of $25.14 per share. During the year ended September 30, 2009, we issued warrants to purchase a
total of approximately 173,000 shares of common stock at a weighted average exercise price of $1.64 per share for services. Share-based
compensation was calculated using the Black-Scholes model.
2009 2008
Risk free interest rate 2.9 % 3.2 %
Expected dividend yield 0.0 % 0.0 %
Volatility 238.1 % 136.6 %
Expected life in years 9.6 7.2
2009 2008
Common stock options $ 3,205,455 $ 693,766
Common stock purchase warrants 59,383 76,913
Issuance of common stock 67,869 33,332
Total share based payments $ 3,332,707 $ 804,011
Total share based payments were recorded as follows:
Research and development expense 86,346 282,873
General and administrative expense 3,246,361 521,138
$ 3,332,707 $ 804,011
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In July 2008, in payment of interest on a note payable with Aspen, we issued five year warrants to purchase 9,000 shares of our
common stock at $1.00 per share (see Note 6). Those warrants vested immediately in 2008 and were valued at $5,933.
In February 2008, three-year warrants to acquire 22,500 shares of common stock were granted to the three new Strategic Advisory
Board members in the amount of 7,500 each. Of the warrants granted, 15,000 are exercisable at $3.33 per share and 7,500 are exercisable at
$2.00 per share. Each person paid $100 for their warrant and all warrants vest in full one year from the date of grant. Share-based compensation
of $33,155 was calculated using the Black-Scholes model, of which $19,826 was recorded to expense for the year ended September 30, 2008,
and the remaining balance was amortized during the year ended September 30, 2009.
The offering of shares of common stock that was consummated in May 2007 included five-year warrants to acquire a total of 289,013
shares of common stock. One third of the total number of warrants is exercisable at $36.67, $53.33 and $66.67 respectively. Such warrants are
generally exercisable only by the original purchaser. The exercise price of the warrants was reduced to $6.67 per share for six days in October
2007 in order to induce exercise and we issued 18,927 common shares for proceeds of $126,000.
A summary of warrants granted and outstanding at September 30, 2008 and 2009 follows:
Warrants outstanding at September 30, 2009 expire at various dates from July 2010 to August 2014.
The following table summarizes stock option activity during the years ended September 30, 2009 and 2008:
The weighted average fair value of the options granted during the years ended September 30, 2009 and 2008 was $1.29 and $1.33
respectively and the weighted average remaining contractual lives of outstanding options at September 30, 2009 was 10 years. For exercisable
and vested options as of September 30, 2009, the weighted average contractual term is also 10 years.
Warrants
Outstanding
Outstanding at September 30, 2007 569,951
Grants 54,000
Cancellations (141,150 )
Exercised (18,927 )
Outstanding at September 30, 2008 463,874
Grants 172,958
Outstanding at September 30, 2009 636,832
Options
Outstanding
Weighted
Average
Exercise
Price
Outstanding at September 30, 2007 (246,896 exercisable options ) 321,146 $ 9.67
Grants during the year ended September 30, 2008 33,150 1.33
Forfeitures and expirations (121,701 ) 23.00
Outstanding at September 30, 2008 (197,580 exercisable options) 232,595 $ 9.67
Grants during the year ended September 30, 2009 2,841,700 1.29
Forfeitures (136,634 ) 6.36
Cancellations (74,916 ) 8.99
Outstanding at September 30, 2009 (2,592,475 exercisable options) 2,862,745 $ 1.31
36
The aggregate intrinsic value of the options outstanding represents the total pretax intrinsic value for all “in-the-money” options (i.e.,
the difference between our closing stock price on the last trading day of September 30, 2009 and the exercise price, multiplied by the number of
shares) that would have been received by the option holders had all option holders exercised their options on September 30, 2009. At
September 30, 2009, there were 3,150 options with exercise prices below the closing price with an intrinsic value of $2,000.
As of September 30, 2009, we had approximately $331,000 of total unrecognized compensation cost related to non-vested stock-based
awards granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for any future changes in estimated
forfeitures. We expect to recognize this cost from 2010 through 2012.
Employee Stock Purchase Plan - In August 2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase Plan”). The
number of shares of common stock that may be sold pursuant to the Stock Purchase Plan shall not exceed, in the aggregate, 900,000 shares of
Common Stock. As of September 30, 2009, no shares have been purchased under the Stock Purchase Plan
Note 8. Development Agreement with a Customer
We were party to a development agreement with a customer to develop proof-of-concept fuel cell power source prototypes (Phase I)
and, if successful and elected by the customer, the development of fuel cell power sources (Phase II). We received $344,000 for certain services
in Phase I and recognized revenue of $154,500 for the completion of the initial Phase I requirement in 2004 and deferred the balance of
$189,500 until the related services are rendered and the final Phase I milestone is reached. We believe the final Phase I milestone was reached
in 2009. However, customer acceptance has not yet occurred and the balance of $189,500 has not yet been recognized as revenue.
Note 9. Commitments and Contingencies
Our corporate headquarters and laboratory facilities are leased under a lease agreement which expired March 31, 2009 and was
extended to September 30, 2009. We currently lease on a month-to-month basis and intend to negotiate with the landlord for a lease extension.
As of September 30, 2009, monthly minimum rental and related payments were approximately $17,000 per month. Rental expense was
approximately $192,000 and $163,000 for the years ended September 30, 2009 and 2008, respectively.
We included an expense of $314,000 in our consolidated financial statements for the year ended September 30, 2008 pertaining to
severance obligations and related costs related to our former Chairman, President and Chief Executive Officer, Paul Abramowitz who resigned
as President and CEO in January 2008 and as a director in April 2008. This amount is included in accounts payable at September 30, 2009 and
2008, however, we contest that any payment is due under our agreements with Mr. Abramowitz and, if successful, will have minimal or no
liability for such amounts.
Note 10. Related Party Transactions
See Note 6 regarding related party note agreements.
During the year ended September 30, 2008, we issued 7,500 shares of common stock to David M. Barnes, formerly our Chief
Financial Officer, in payment for services rendered. The shares were valued at $10,000.
Note 11. Income Taxes
Significant components of our deferred tax assets and liabilities and related valuation allowances are as follows as of September 30,
2009 and 2008:
37
We have established a valuation allowance as of September 30, 2009 and 2008, due to the uncertainty of future realization of the net
deferred tax assets. During the years ended September 30, 2009 and 2008, the valuation allowance increased by $2,271,000 and $2,395,000,
respectively.
The difference between the tax at the statutory federal tax rate and no tax provision for the years ended September 30, 2009 and 2008
is primarily due to our full valuation allowance against our deferred tax assets.
At September 30, 2009, we had net operating loss carryforwards for Federal income tax purposes of approximately $40,500,000 and
research and development credit carryforwards of approximately $973,000 available to offset future income that expire through 2028.
Utilization of the carryforwards is dependent on generating future taxable income and may be limited by Internal Revenue Code Section 382
due to the more than 50% change in control in NPSWA's ownership in its acquisition in March 2006.
Note 12. Subsequent Events through January 13, 2010 (the date these financial statements were issued).
Agile Opportunity Fund, LLC and Capitoline Advisors, Inc. - In October and November 2009, we issued additional notes to Capitoline
in the aggregate face amount of $164,000, and aggregate purchase price amount of $141,000. Under the terms of the Securities Purchase
Agreement, 166,000 additional shares valued at $156,000 are also issuable and will be recorded as interest expense.
In November 2009, we also entered into a 4 th Amendment to Securities Purchase Agreement with Agile and Capitoline whereby we
issued 10,000,000 shares of our common stock to be held as additional collateral for the Notes issued to these lenders.
SolCool Shares. In October 2009, under the terms of the Amended Merger Agreement with SolCool, we issued 238,000 shares of our
common stock to the owners of SolCool. 238,000 additional common shares were issued in October 2009 and will be held in escrow to ensure
best-effort execution of SolCool’s obligations under the Amended Merger Agreement. The closing of the merger is subject to other customary
closing conditions including the filing of the articles of merger with the applicable states.
Summit Agreement. In October 2009, we entered into an advisory services agreement with Summit whereby Summit will indentify,
introduce, engage, and compensate investor relations and/or public relations firms (“Firms”) on our behalf. We issued Summit 1,650,000 shares
under the terms of this agreement, 95% of the value of which is to represent compensation to be applied against services provide by Firms.
Daisy Rodriguez. In October 2009, we received $25,000 in additional funds from Daisy Rodriguez, a private investor married to the
primary beneficiary of Summit. The balance will be added to the aggregate face amount of the $100,000 note payable currently outstanding
(See Note 6) and will have the same 6% interest and April 30, 2010 maturity date.
2009 2008
Deferred tax assets (liabilities):
Accelerated depreciation $ 5,000 $ 128,000
Research & development credit 973,000 916,000
Accrued vacation 12,000 19,000
Accrued severance and wages 139,000 119,000
Shared-based compensation expense 2,174,000 1,072,000
Net operating loss carryforwards 13,770,000 12,548,000
Total net deferred tax assets 17,073,000 14,802,000
Valuation allowance (17,073,000 ) (14,802,000 )
Deferred tax assets, net of valuation allowance $ - $ -
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ITEM 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
There are not and have not been any disagreements between us and our accountants on any matter of accounting principles, practices
or financial statement disclosure.
ITEM 9A(T): Controls and Procedures.
Management has used the framework set forth in the report entitled Internal Control – Integrated Framework published by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to evaluate the effectiveness of our internal control over
financial reporting. Management was unable to implement its remediation plans during 2009 due to cost considerations. As a result of the
material weaknesses described below, management has concluded that our internal control over financial reporting was not effective as of
September 30, 2009.
Management has determined that, as of the September 30, 2009 measurement date, there were deficiencies in both the design and the
effectiveness of our internal control over financial reporting. Management has assessed these deficiencies and determined that there were
various material weaknesses in our internal control over financial reporting. As a result of our assessment that material weaknesses in our
internal control over financial reporting existed as of September 30, 2009, management has concluded that our internal control over financial
reporting was not effective as of September 30, 2009. The existence of a material weakness or weaknesses is an indication that there is a more
than remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period.
(a) Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K, we carried out
an evaluation, under the supervision and with the participation of senior management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based
upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective in recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or
submit under the Exchange Act due to the material weaknesses in our internal control over financial reporting. A discussion of
the material weaknesses in our controls and procedures is described below.
(b) Internal Control over Financial Reporting . There have been no changes in our internal controls over financial reporting or in
other factors during the fourth fiscal quarter ended September 30, 2009 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting subsequent to the date we carried out our most recent evaluation.
(c) Management Report on Internal Control . Management is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act, is a process designed by, or under the supervision of, our CEO and CFO, or persons performing similar
functions, and effected by our board of directors, management or other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Our management, with the participation of our CEO and CFO, has established and maintained
policies and procedures designed to maintain the adequacy of our internal control over financial reporting, and include those
policies and procedures that :
· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets;
· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our
assets that could have a material effect on the interim or annual consolidated financial statements.
39
Management has assigned a high priority to the short-and long-term improvement of our internal control over financial reporting. We
have listed below the nature of the material weaknesses we have identified, the steps we are taking to remediate these material weaknesses and
when we expect to have the material weaknesses remediated.
We intend to design and implement policies and procedures to remediate the material weaknesses in our internal control over financial
reporting in fiscal 2010.
This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules
of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all errors or misstatements and
all fraud. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance that the objectives of
the policies and procedures are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ITEM 9B. Other Information.
None
· Inadequate or ineffective policies for documenting transactions;
· Inadequate or ineffective design of policies and execution of processes related to accounting for transactions; and
· Inadequate or ineffective internal control environment related to segregation of duties.
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PART III
Item 10: Directors, Executive Officers and Corporate Governance.
The following table sets forth the names and ages as of January 12, 2010 of our directors and executive officers:
Set forth below is biographical information concerning our directors and executive officers.
Dr. Gerard C. (Chris) D’Couto has served as a member of our board of directors since January 28, 2008 and as our Chief Executive Officer
and President since February 2008. Until such time, he served as our Chief Operating Officer and Executive Vice President since September
2007. Prior to joining us, Dr. D’Couto served as senior director of marketing at FormFactor Inc. from January 2006, where he headed the
launch of NAND flash and DRAM sort probe cards. Prior to that, Dr. D’Couto had a nine-year tenure at Novellus Systems, Inc., with positions
of increasing responsibility ranging from product management to technology development and sales. Prior to that, Dr. D’Couto worked at
Varian Associates and as a consultant to Intel Corporation. Dr. D’Couto received a bachelor’s degree in chemical engineering from the
Coimbatore Institute of Technology in India and also received a master’s and a doctoral degree in chemical engineering from Clarkson
University in New York. Dr. D’Couto also earned an MBA from the Haas School of Business at the University of California, Berkeley.
Jon M. Garfield has served on our board of directors since May 2008. He has served as Chief Executive Officer of technology company
Clearant, Inc. (OTCBB: CLRA) since January 2007 and as Chief Financial Officer at Clearant since September 2006. Mr. Garfield has served
as a member of its board of directors since May 2007. From September 2001 through 2006, Mr. Garfield served as an independent financial
consultant, including advising as to SEC reporting obligations and Sarbanes-Oxley compliance. From 1998 until 2001, he served as Chief
Financial Officer of a telecom service provider and a software developer. From 1996 to 1998, he served as Vice President of Acquisitions for
formerly NYSE-listed ground transportation consolidator Coach USA, Inc. From 1991 to 1996, Mr. Garfield served as Corporate Assistant
Controller of Maxxim Medical, Inc., a formerly New York Stock Exchange listed manufacturer and distributor. During 1986 to 1991, Mr.
Garfield practiced public accounting with Arthur Andersen and PricewaterhouseCoopers. Mr. Garfield received a Bachelor of Business
Administration in Accounting from University of Texas, Austin.
Ed Cabrera has served on our board of directors since June 2009. Mr. Cabrera has worked on Wall Street for over 20 years, including his
current position as Head of Investment Banking at Jesup & Lamont Securities Corporation where he has been employed since July 2005, at J.
Giordano Securities Group from March 2004 until July 2005 and with Merrill Lynch as Managing Director and Head of Latin America from
May 1993 until December 2002. Since 2003, Mr. Cabrera has focused on providing advisory services and capital market access for emerging
growth companies. Mr. Cabrera was selected for the 2000 Millenium edition of Who’s Who In Finance and in 1999 was named to the All-
America team by Institutional Investor. Mr. Cabrera received his Bachelor of Science from the University of Florida in Engineering and
Material Sciences where he graduated with honors and received his MBA in 1987 from Harvard Business School.
Name Age Position
Dr. Gerard C. D’Couto 43 President and Chief Executive Officer, Director
Jon M. Garfield 46 Director
Eduardo Cabrera 50 Director
Michael Selsman 73 Director
Paul Sidlo 53 Director
Stephen M. Wilson 54 Chief Financial Officer
James H. Smith Former Director
Robert J. McGovern Former Director
Michael Solomon Former Director
Leroy Ohlsen Former Director
41
Michael Selsman has served on our board of directors since September 2009. Mr. Selsman writes and edits financial analyses, annual reports,
stockbroker-investor overviews, corporate presentations, speeches, books and media communications for public and private companies. He has
an extensive background in marketing, public relations, fund raising, media relations, strategic planning, corporate identity/image, public policy
advocacy, employee communications and advertising. For the last 20 years, Mr. Selsman has been a principal of Public Communications Co.,
of Beverly Hills, CA and for the last five years has been President and CEO of Archer Entertainment Media Communications, Inc.
(AEMC:PK).
Paul Sidlo has served on our board of directors since July 2009. Since 1987 Mr. Sidlo has been CEO and a director at Rez-N-8 Productions,
Inc. (“REZN8”), a company that he founded that designs and creates high-end graphics, multi-media branding and graphical image systems
that are employed to build and promote a brand. REZN8 served as principal outside design consultant for Microsoft, responsible for graphical
user interface (GUI) development and production and development for XBOX, XBOX2, XBOX LIVE, MSN9&10, HOME MEDIA CENTER,
WindowsXP and Microsoft’s Home of the Future. Mr. Sidlo is also Chief Creative Officer and a director of EMN8, a company that he cofounded
in 2002 that is involved in the development and use of real-time rich media to better manage customer relationships in a variety of
industries.
Stephen M. Wilson, CPA, CMA has served as our Chief Financial Officer since July 2008 and Corporate Secretary and Controller since
June 2008. From May 2007 until February 2008, he served as Chief Financial Officer of Impart Media Group, Inc., a publicly-held digital
signage technology company. From July 2006 until his promotion to Chief Financial Officer of Impart, he served as its Vice President of
Finance/Corporate Controller. Impart Media Group, Inc. consented to bankruptcy relief on May 21, 2008 following a petition for involuntary
bankruptcy filed on February 14, 2008 in the United States Bankruptcy Court for the Southern District of New York. From 2004 to 2006, he
served as Division Controller for Rabanco Companies, a division of Allied Waste. From 2000 to 2004, Mr. Wilson was owner and President of
Strategic Finance & Accounting Services, Inc. He is a licensed Certified Public Accountant and is also a Certified Management Accountant and
holds dual Bachelor of Arts degrees in Accounting and Business Administration from Western Washington University.
Composition of Board of Directors
Our bylaws authorize no less than one (1) and no more than seven (7) directors. We currently have five directors on our board of
directors (the “Board”).
Term of Office
Our directors are appointed for one-year term to hold office until the next annual general meeting of our shareholders or until removed
from office in accordance with our bylaws. Our officers are appointed by the Board and hold office until removed by the Board.
Family Relationships
None.
Director or Officer Involvement in Certain Legal Proceedings
None.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors and persons who beneficially
own more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common
stock. These insiders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file, including Forms 3, 4 and 5.
Based solely upon our review of copies of such forms that we have received, and other information available to us, to the best of our
knowledge each of the following persons was late in filing one Form 4: Gerard C. D’Couto, Stephen M. Wilson, Eduardo Cabrera, Jon
Garfield, Paul Sidlo, and Michael Selsman.
42
Code of Ethics Disclosure
We have a Code of Ethics that applies to our directors and officers or others performing similar functions. Any person can receive a
free copy of our Code of Ethics upon written request.
Audit Committee of the Board of Directors
We have an audit committee of the Board consisting of one independent director, Jon M. Garfield. The Audit Committee functions in
part as an independent and objective party with oversight of our financial reporting process and internal controls.
Compensation Committee of the Board of Directors
Compensation Committee functions are currently administrated by the full Board. The Compensation Committee formerly consisted
of James H. Smith and Robert J. McGovern until their departure from the Board in 2009. The functions of the Compensation Committee are to
review and approve the goals of the Chief Executive Officer, to review and approve salaries, bonuses and other benefits payable to our
executive officers and to administer our Long Term Incentive Compensation Plan and Employee Stock Purchase Plan.
Nominating Committee of the Board of Directors
Nominating Committee functions are currently administrated by the full Board. The Nominating Committee formerly consisted of
James H. Smith and Michael F. Solomon until their departure from the Board in 2009. The Nomination Committee is responsible for proposing
a slate of directors for election by the stockholders at each annual stockholders meeting and for proposing candidates to fill any vacancies.
43
ITEM 11: EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information concerning the compensation of (i) our Chief Executive
Officer, (ii) our Chief Financial Officer, and (iii) our other most highly compensated executive officers (“Named Executive Officers”) during
the fiscal years ended September 30, 2009 and 2008:
Summary Compensation Table
We have recorded expense in our consolidated financial statements for the year ended September 30, 2008 and included in this table $314,000
pertaining to severance obligations and related costs pertaining to Mr. Abramowitz’s resignation as President and CEO in January 2008 and as
a director in April 2008. We contest that any payment is due under its agreements with Mr. Abramowitz and, if successful, will have minimal
or no liability for such amounts.
Dr. Gerard C. (Chris) D'Couto: Under the terms of the Offer Letter entered into between Dr. Gerard C. (Chris) D’Couto and us when he
joined us as Chief Operating Officer, he receives a per annum base salary of $225,000 and, a bonus equal to 50% of his base salary upon the
completion of certain milestones. Due to our financial circumstances, Dr. C’Couto has taken a reduction in salary and did not earn the base
salary of $225,000 in the year ended September 30, 2009. In the event Dr. D’Couto’s employment is terminated (i) for any reason other than
for cause or a winding down of our operations or (ii) due to a change in control where he is not offered a comparable position at a similar
compensation, Dr. D'Couto will be entitled to a severance payment equal to six months of his then current base salary.
Outstanding Equity Awards At Fiscal Year-End
The following table sets forth information regarding the outstanding equity awards held by our Named Executive Officers as of
September 30, 2009:
Name and
Principal
Position Year Salary ($) Bonus ($)
Stock
Awards ($)
Option
Awards ($)
Non-Equity
Incentive Plan
Compensation
($)
Non-qualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($) Total ($)
Gerard C. ("Chris") D'Couto 2009 $ 106,000 $ 2,649,000 $ 11,000 $ 2,766,000
President & CEO 2008 210,000 — 14,000 224,000
Stephen M. Wilson 2009 $ 106,000 $ 331,000 $ 11,000 $ 448,000
Chief Financial Officer 2008 53,000 20,000 6,000 79,000
Tsali Cross
(1)
2009 $ 83,000 $ 19,000 $ 5,000 $ 107,000
VP Engineering 2008 98,000 5,000 79,000
Paul Abramowitz
Former President & CEO 2008 $ 377,000 $ 377,000
(1) Dr. Cross does not serve as an officer.
44
Outstanding Equity Awards at Fiscal Year-End
Compensation of Directors
The following table sets forth information regarding the compensation of directors during the fiscal year ended September 30, 2009:
(1) Fees earned in cash and stock awards not issued and are recorded as accrued compensation. Options awards consist of 172,500 fully vested
options exercisable at $1.28 per share and expiring in September 2019.
(2) Options awards consist of 103,500 fully vested options exercisable at $1.28 per share and expiring in September 2019.
Option Awards Stock Awards
Name
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Option
Exercise
Price
($)
Option
Expiration
Date
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
Market
Value of
Shares
or Units
of Stock
That
Have
Not
Vested
($)
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
Dr. Gerard C. (Chris)
D'Couto 2,070,000 $ 1.28 Sep. 2019
Stephen M. Wilson
Chief Financial Officer 64,688 194,062 $ 1.28 Sep. 2019
3,000 9,000 $ 1.67 Apr. 2018
DIRECTOR COMPENSATION
Change in
Fees
Earned
or Paid
in Cash
Stock
Awards
Option
Awards
Non-Equity
Incentive Plan
Compensation
Pension Value
and
Nonqualified
Deferred
Earnings
All Other
Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
Jon M. Garfield (1) 10,000 29,000 221,000 260,000
Eduardo Cabrera (2) 132,000 132,000
Michael Selsman (3) 88,000 88,000
Paul Sidlo (4) 110,000 110,000
James H. Smith (5) 17,000 38,000 16,000 71,000
Robert J. McGovern (6) 11,000 26,000 2,500 39,500
Michael Solomon (7) 5,000 15,000 20,000
45
(3) Options awards consist of 69,000 options exercisable at $1.28 per share of which 17,250 are fully vested. The options expire in September
2019.
(4) Options awards consist of 86,250 fully vested options exercisable at $1.28 per share and expiring in September 2019.
(5) Fees earned in cash and stock awards not issued and are recorded as accrued compensation. Other compensation consisted of consulting
services and was earned and paid.
(6) Fees earned in cash and stock awards not issued and are recorded as accrued compensation. Other compensation consisted of consulting
services and was earned and paid.
(7) Fees earned in cash and stock awards not issued and are recorded as accrued compensation.
Stock Option Plan and Stock Options
In August 2008, we amended our Long Term Incentive Compensation Plan (the “Plan”) first adopted in March 2006. Under the
amended Plan, the maximum number of shares issuable is 6,000,000. As of September 30, 2009, there were 2,862,745 stock options issued
under the amended Plan.
The Plan was adopted by the Board on March 14, 2006, to be effective on March 14, 2006, and was approved by the stockholders on
that same date. The Plan is to continue for a term of ten years from the date of its adoption. The Plan seeks to promote the long-term success of
our company and our subsidiaries and to provide financial incentives to employees, members of the Board and advisors and consultants of our
company and our subsidiaries to strive for long-term creation of stockholder value by providing stock options and other stock and cash
incentive.
The functions of the Compensation Committee are currently administered by the full Board. Until their departure from the Board in
2009, the Compensation Committee was comprised of two members of our Board of Directors, James Smith and Robert McGovern who
administered the Plan. The Compensation Committee has the authority to make awards, construe and interpret the Plan and any awards granted
thereunder, to establish and amend rules for Plan administration, to change the terms and conditions of options and other awards at or after
grant, and to make all other determinations which it deems necessary or advisable for the administration of the Plan.
To date, the Committee has awarded stock options for 2,862,745 shares to employees, members of the Board and advisors and
consultants, and none of these options has as of yet been exercised. If we change the number of issued shares of common stock by stock
dividend, stock split, spin-off, split-off, spin-out, recapitalization, merger, consolidation, reorganization, combination, or exchange of shares,
the total number of shares reserved for issuance under the Plan, the maximum number of shares which may be made subject to an award or all
awards in any calendar year, and the number of shares covered by each outstanding award and the price therefor, if any, may be equitably
adjusted by the Committee, in its sole discretion.
The Board of Directors or the Committee may amend, suspend, terminate or reinstate the Plan from time to time or terminate the Plan
at any time. However, no such action shall reduce the amount of any existing award (subject to the reservation of the authority of the
Committee to reduce payments on awards) or change the terms and conditions thereof without the consent of any affected award recipient.
Employee Stock Purchase Plan
In August 2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase Plan”). The amount of shares of common stock
that may be sold pursuant to the Stock Purchase Plan shall not exceed, in the aggregate, 900,000. As of September 30, 2009, no shares have
been purchased under the Stock Purchase Plan
46
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMEENT AND RELATED
STOCKHOLDER MATTERS
Set forth below is certain information as of December 31, 2009 with respect to each person or group who is known to us, in reliance
on Schedules Forms 4 and transfer agent records in reporting beneficial ownership and filed with the SEC, to beneficially own more than 5% of
our common stock. Except as otherwise noted below, all shares of common stock are owned beneficially by the individual or group listed with
sole voting and/or investment power.
SECURITY OWNERSHIP OF MANAGEMENT
Set forth below is certain information as of December 31, 2009 for (i) the members of and nominees for the Board of Directors, (ii)
our executive officers, and (iii) our directors and executive officers as a group. No shares identified below are subject to a pledge.
Name and Address of Beneficial Owner (1)
Amount
Beneficial
Ownership
Class of
Beneficial
Ownership
Percent
of
Class
Summit Trading Limited
Charlotte House, P.O. Box N-65
Charlotte Street
Nassau, Bahamas (2) 1,938,506
Common
Stock 5.1 %
Green World Trust
4093 Quakerbridge Road
Princeton Jct, NJ 08550 (3) 4,823,060
Common
Stock 12.3 %
(1) Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all
shares of our common stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be
acquired by such person within 60 days from the date on which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner’s percentage ownership is determined by assuming that options, warrants and
convertible securities that are held by such person (but not those held by any other person) and which are exercisable, convertible or
exchangeable within such 60 day period, have been so exercised, converted or exchanged.
(2) Summit Trading Limited (“Summit”) is a Bahamian holding company and is owned by the Weast Family Trust. The Weast Family Trust
is a private trust established for the benefit of C.S. Arnold, Daisy Rodriguez, Stephanie Kaye and Tracia Fields. C.S. Arnold is the settlor
of the Weast Family Trust. The natural person exercising voting control of the shares of our common stock held by Summit is Richard
Fixaris.
(3) The natural person exercising voting control over the shares of our common stock is Darren Baldo, Trustee of Green World Trust.
Name and Address of Beneficial Owner (1)
Amount and
Nature of
Beneficial
Ownership
Percent of
Class
Dr. Gerard C. D’Couto, President, Chief Executive Officer, Director (2) 2,470,002 6.6 %
Jon Garfield, Director (3) 172,500 *
Eduardo Cabrera, Director (4) 103,000 *
Paul Sidlo, Director ( 5 ) 86,250 *
Michael Selsman, Director ( 6 ) 69,000 *
Stephen M. Wilson, Chief Financial Officer ( 7 ) 350,754 *
All Directors and Officers as a Group (6 individuals) 3,251,506 8.7 %
47
* Less than one percent.
(1) Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all
shares of our common stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be
acquired by such person within 60 days from the date on which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner’s percentage ownership is determined by assuming that options, warrants and
convertible securities that are held by such person (but not those held by any other person) and which are exercisable, convertible or
exchangeable within such 60 day period, have been so exercised, converted or exchanged. Unless otherwise indicated, the address of all
of the above named persons is c/o Neah Power Systems, Inc., 22118 20th Avenue SE, Suite 142, Bothell, Washington 98201.
(2) Consists of 400,002 common shares and 2,070,000 shares of common stock underlying options which are fully vested.
(3) Consists of 172,500 shares of common stock underlying options which are fully vested.
(4) Consists of 103,500 shares of common stock underlying options which are fully vested.
(5) Consists of 86,250 shares of common stock underlying options which are fully vested.
(6) Consists of 69,000 shares of common stock underlying options of which 17,250 are fully vested.
(7) Consists of 80,004 common shares and 270,750 shares of common stock underlying options of which 67,688 are fully vested.
48
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
In September 2008, we entered into a note agreement with Summit Trading Limited (“Summit”). Under the agreement, we borrowed
$15,000 at no interest with a maturity date of October 2, 2008. The balance was paid in full in August 2009. The principal balance is included
in notes payable, related parties on our consolidated balance sheet at September 30, 2008.
In September 2009, we received funds from Daisy Rodriguez, a private investor married to the primary beneficiary of Summit, in the
aggregate face amount of $100,000 at 6% interest and an April 30, 2010 maturity date. The principal balance is included in notes payable,
related parties on our consolidated balance sheet at September 30, 2009.
In August 2008, we entered into a note agreement with our President and Chief Executive Officer, Dr. Gerard C. D’Couto. Under the
agreement, as amended, we borrowed $30,000 with interest at 10% compounded monthly and a maturity date of March 29, 2009. As of
September 30, 2009 the remaining note balance was $2,400. The principal balance is included in notes payable, related parties on our
consolidated balance sheet.
Director Independence
Because they are not employees and have no other business relationships with us except as directors, the Board of Directors has
determined that Messrs. Garfield, Cabrera, Sidlo, and Selsman qualify as independent directors.
49
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The firm of Peterson Sullivan LLP has been appointed to serve as our independent registered public accounting firm for the 2009 fiscal year
unless the Audit Committee deems it advisable to make a substitution. Our Audit Committee has responsibility for the approval of all audit
and non-audit services before we engage an accountant. All of the services rendered to us by Peterson Sullivan LLP for the periods ended
September 30, 2009 and September 30, 2008 were pre-approved by the Audit Committee before the engagement of the auditors for such
services. Our pre-approval policy will expressly provide for the annual pre-approval of all audits, audit-related and all non-audit services
proposed to be rendered by the independent auditor for the fiscal year, as specifically described in the auditor's engagement letter, such annual
pre-approval to be performed by the Audit Committee.
The following table represents the aggregate fees billed for professional audit services rendered to us by Peterson Sullivan LLP for the
audit of our annual financial statements during the year ended September 30, 2009 and 2008, and all fees billed for other services by Peterson
Sullivan LLP during those periods:
(1) Audit Fees. These are fees for professional services for the audit of our annual financial statements, and for the review of the financial
statements included in our filings on Form 10Q and for services that are normally provided in connection with statutory and regulatory filings
or engagements, including late filings for previous years.
(2) Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning.
(3) All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e., Audit Fees or Tax Fees.
Item 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1)(2) Financial Statements.
The financial statements listed in the Index to Financial Statements are filed as part of this Annual Report on Form 10-K.
(a)(3) Exhibits.
The exhibits required by this Item are set forth on the Exhibit Index attached hereto.
2009 2008
Audit Fees (1) $ 62,458 $ 74,246
Audit Related Fees (1) 11,521 60,076
Tax Fees (2) 280 —
All other Fees (3) — 22,049
Total Accounting Fees and Services $ 74,259 $ 156,370
50
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by its duly authorized representatives.
In accordance with the Securities and Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Dated: January 13, 2010 NEAH POWER SYSTEMS, INC.
By: /s/ GERARD C. D’OUTO
Gerard C. D’Couto
President and Chief Executive Officer
Signature Title(s) Date
/s/ GERARD C. D’COUTO President and Chief Executive Officer January 13, 2010
Gerard C. D’Couto (Principal Executive Officer)
/s/ STEPHEN M. WILSON Chief Financial Officer January 13, 2010
Stephen M. Wilson (Principal Financial and Accounting Officer)
/s/ EDUARDO CABRERA Director January 13, 2010
Eduardo Cabrera
/s/ JON M. GARFIELD Director January 13, 2010
Jon M. Garfield
/s/ PAUL SIDLO Director January 13, 2010
Paul Sidlo
/s/ MICHAEL SELSMAN Director January 13, 2010
Michael Selsman
51
Exhibit Index
No. Description
3.1 Articles of Incorporation, as amended (1)
3.2 Amended and Restated By-laws (1)
3.3 Certificate of Designation of Series A Preferred Stock (1)
3.4 Certificate of Merger (1)
4.1 Form of Stock Certificate for Common Stock (1)
4.2 Form of Stock Certificate for Preferred Stock (1)
10.1 Engagement Letter, dated as of March 20, 2006 by and between Neah Power Systems, Inc. and BMA Securities, Inc. (2)
10.2 Agreement and Plan of Merger among Neah Power Systems, Inc., Growth Mergers, Inc. and Growth Acquisitions Inc. (2)
10.3
Amendment to Agreement and Plan of Merger among Neah Power Systems, Inc., Growth Mergers, Inc. and Growth
Acquisitions Inc. (2)
10.5 Form of warrant to purchase 3,753,000 shares of common stock (1)
10.6 Collaboration Agreement effective April 1, 2004 between Novellus Systems, Inc. and Neah Power Washington (5)
10.7
Letter Agreement extending the Collaboration Agreement, dated May 24, 2006 by and among Novellus Systems, Inc. , Neah
Power Washington and Neah Power Systems, Inc. (2)
10.8
Amendment to Letter Agreement extending the Collaboration Agreement, dated August 22, 2006 by and among Novellus
Systems, Inc., Neah Power Washington and Neah Power Systems, Inc. (3)
10.9
Amendment to Letter Agreement extending the Collaboration Agreement, dated August 22, 2006 by and among Novellus
Systems, Inc., Neah Power Washington and Neah Power Systems, Inc. (7)
10.10 Warrant issued to Novellus Systems, Inc. (2)
10.11 Option Agreement issued to Dr. John Drewery (2)
10.12 Stock Option Plan (2)
10.13 Form of Stock Option Agreement (2)
10.14
Development Agreement by and between Neah Power Washington and Thales Communications, Inc. dated December 19,
2003 (3)
52
10.15
Amendment No. 1 to Development Agreement by and between Neah Power Washington and Thales Communications, Inc.
dated July 28, 2004 (2)
10.16 Employment Agreement of Paul Abramowitz dated August 1, 2007 (6)
10.17
Lease Agreement, dated as of March 5, 2001, by and between Teachers Insurance and Annuity Association of America and
Neah Power Washington (3)
10.18
First Amendment to Lease Agreement, dated as of June 6, 2003, by and between Teachers Insurance and Annuity Association
of America and Neah Power Washington (3)
10.19
Second Amendment to Lease Agreement, dated as of July 7, 2006, by and between Teachers Insurance and Annuity
Association of America and Neah Power Washington (3)
10.20 Consultancy Agreement by and between Danfoss A/S and Neah Power Systems, Inc., dated as of June 14, 2006 (3)
10.21
Amendment to Letter Agreement extending the Collaboration Agreement, dated August 22, 2006 by and among Novellus
Systems, Inc., Neah Power Washington and Neah Power Systems, Inc. (4)
10.22 Settlement Agreement and Mutual General Releases between Burt Martin Arnold Securities, Inc. and Neah Power Systems,
Inc. dated as of November 26, 2007
10.23 Services Agreement between Neah Power Systems, Inc. and Daniel Rosen (7)
10.24 Employment Agreement Neah Power Systems, Inc. and Dr. Gerard C (Chris) D'Couto (8)
10.25 10% Convertible Secured Promissory Note to EPD Investment Co., LLC due January 1, 2009 (9)
10.26 Common Stock Purchase Warrant of EPD Investment Co., LLC (9)
10.27 Purchase Agreement between Neah Power Systems, Inc. and EPD Investment Co., LLC (9)
10.28
Security Interest Agreement dated as of November 12, 2007, between Neah Power Systems, Inc. and EPD Investment Co.,
LLC (9)
10.29 12% Secured Promissory Note to CAMHZN Master LDC due June 28, 2008 (9)
10.30 Common Stock Purchase Warrant of CAMHZN Master LDC (10)
10.31 Purchase Agreement dated as of November 28, 2007, between Neah Power Systems, Inc. and CAMHZN Master LDC (10)
10.32
Security Interest and Pledge Agreement dated as of November 28, 2007, between Neah Power Systems, Inc. and CAMHZN
Master LDC (10)
10.33 Repayment Issuance Letter dated November 28, 2007, to CAMHZN Master LDC (10)
10.34 Securities Purchase Agreement dated February 12, 2009 among Neah Power Systems, Inc., Agile Opportunity Fund, LLC and
Capitoline Advisors Inc.
53
(1) Filed as an Exhibit to the Registrant’s Registration Statement on Form 10-SB, filed on May 1, 2006 and incorporated herein by reference
thereto.
(2) Filed as an Exhibit to the Registrant’s Registration Statement on Form 10-SB, filed on July 27, 2006 and incorporated herein by reference
thereto.
(3) Filed as an Exhibit to the Registrant’s Registration Statement on Form 10-SB, filed on September 12, 2006 and incorporated herein by
reference thereto.
(4) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K, filed on September 28, 2006 and incorporated herein by reference
thereto.
(5) Filed as an Exhibit to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 filed on May 3, 2007.
(6) Filed as an Exhibit to the Registrant's Current Report on Form 8-K, filed on August 8, 2007, and incorporated herein by reference thereto.
(7) Filed as an Exhibit to the Registrant's Current Report on Form 8-K, filed on August 17, 2007, and incorporated herein by reference thereto.
(8) Filed as an Exhibit to the Registrant's Current Report on Form 8-K, filed on September 5, 2007, and incorporated herein by reference
thereto.
(9) Filed as an Exhibit to the Registrant's Current Report on Form 8-K, filed on November 9, 2007, and incorporated herein by reference
thereto.
(10) Filed as an Exhibit to the Registrant's Current Report on Form 8-K, filed on November 28, 2007, and incorporated herein by reference
thereto.
10.35 Form of Initial Original Issue Discount Term Promissory Note issued by Neah Power
10.36 Security Agreement dated February 12, 2009 among Neah Power Systems, Inc., Agile Opportunity Fund, LLC and Capitoline
Investors Inc.
10.37 Form of Patent Security Agreement dated February 12, 2009 among Neah Power Systems, Inc., Agile Opportunity Fund, LLC
and Capitoline Advisors Inc.
14.1 Code of Ethics (5)
21.1 Subsidiaries of the Registrant (2)
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 per Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 per Section 906 of the Sarbanes-Oxley Act of
2002
54
Exhibit 31.1
CERTIFICATION
Pursuant to 18 U.S.C. 1350
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Gerard C. D’Couto, Chief Executive Officer of Neah Power Systems, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Neah Power Systems, Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying office and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s fourth quarter of 2009 that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
1
5. The registrant’s other certifying office and I have disclosed, based on my most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: January 13, 2010 By: /s/ GERARD C. D’COUTO
Gerard C. D’Couto
Chief Executive Officer
2
Exhibit 31.2
CERTIFICATION
Pursuant to 18 U.S.C. 1350
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Stephen M. Wilson, Chief Financial Officer of Neah Power Systems, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Neah Power Systems, Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying office and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s fourth quarter of 2009 that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
1
5. The registrant’s other certifying office and I have disclosed, based on my most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: January 13, 2010 By: /s/ STEPHEN M. WILSON
Stephen M. Wilson
Chief Executive Officer
2
EXHIBIT 32.1
CERTIFICATION
Pursuant to 18 U.S.C. 1350
(Section 302 of the Sarbanes-Oxley Act of 2002)
In connection with the Annual Report on Form 10-K of Neah Power Systems, Inc. (the “Company”) for the year ended September 30,
2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Gerard C. D’Couto, Chief Executive Officer,
hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
This certification accompanies each Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as
amended.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: January 13, 2010 By: /s/ GERARD C. D’COUTO
Gerard C. D’Couto
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION
Pursuant to 18 U.S.C. 1350
(Section 302 of the Sarbanes-Oxley Act of 2002)
In connection with the Annual Report on Form 10-K of Neah Power Systems, Inc. (the “Company”) for the year ended September 30,
2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Stephen M. Wilson, Chief Executive Officer,
hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
This certification accompanies each Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as
amended.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: January 13, 2010 By: /s/ STEPHEN M. WILSON
Stephen M. Wilson
Chief Financial Officer